There’s no evidence pay hikes improve directors’ performance. So why do we continue to stuff their pockets?
In 2011, just months after a €64bn-bailout of Irish banks, a Bank of Ireland shareholder from the Dublin suburb of Blackrock waited all morning at the bank’s annual general meeting (AGM).
When the opportune time arose, Gary Keogh threw eggs at then-chairman Pat Molloy and chief executive Richie Boucher, narrowly missing the two executives.
Keogh, who’d also fired rotten eggs at Dermot Gleeson, an ex-chairman, at a 2009 AGM, said after the meeting that throwing the eggs helped “bring his blood pressure down”.
During the financial crisis, tempers often flared as bank shareholders.
Often pensioners who lost their retirement money as shares once thought to be as solid as gold became worthless demanded executives atone for the disastrous mistakes they made during the Celtic Tiger.
During the pandemic, AGM season was far more muted. Meetings went online or were held in hybrid form.
Small wonder that there was a marked decline in the level of shareholder engagement with Irish public companies last year, as business law firm Mason Hayes & Curran, which produces an annual analysis of AGM season, concluded in its 2021 report.
Indeed, just two companies that held votes on their annual directors’ remuneration policies, ie Kingspan and Cairn Homes, recorded a vote of at least 22pc against the resolution.
But as companies began holding AGMs in person this spring for the first time since the onset of the pandemic, they are coming under greater scrutiny from shareholders and proxy advisory firms.
These make voting recommendations for large investors, as executive pay and bonuses rise on the back of an economic bounceback from Covid-19 restrictions and as stock markets frothed over last year on the back of unprecedented economic stimulus.
“If you look back at AGMs from the crash, it looks nearly quaint, with older generations giving out to the CEO and the chairman over banking shares,” says Mark O’Donnell, managing partner at Odgers Berndtson Dublin and a specialist in recruiting senior executives. “Now proxy organisations have a huge sway over our big corporates — the Smurfit Kappas, the Kerry Group’s, the Glanbia’s, the Flutters of this country. If you are in an investor relations team within those businesses, this isn’t something you had to deal with five years ago but absolutely must now.”
Also at the end of April, Paddy Power-owner Flutter faced opposition from a group of shareholders over the betting company’s decision to increase the basic pay of its CEO by 26pc and that of its chief financial officer by 20pc.
And about 20pc of shareholders at Kingspan, the building materials and insulation maker, opposed adopting the report of the group’s remuneration committee policy on directors’ remuneration and a separate proposed improvement of a long-term incentive share plan.
The opposition followed calls earlier in April by global proxy advisory company Glass Lewis for Kingspan shareholders to reject the plan. Kingspan CEO Gene Murtagh saw his compensation soar 75pc in 2021 to €5.71m.
Indeed, the pay packages of the CEOs of eight of the top-ten companies listed on Dublin’s Iseq index were 66pc higher, at a median €4.79m, in 2021 than they were before the pandemic in 2019, according to analysis of annual reports by The Irish Times last month. Albert Manifold, CEO of building materials giant CRH, got compensation of €13.9m, making him the highest-paid boss of an Irish-listed company. His base salary was €1.6m.
Debate about pay and bonuses for senior executives has also been reignited after Francesca McDonagh made a surprise announcement at the end of last month that she would be leaving Bank of Ireland in September, having spent five years as the first female CEO of a major Irish lender.
She’s taking up a new job at Credit Suisse in Zurich, a decision that has reportedly been influenced by a massive pay hike for the move, with industry experts estimating her new role would command €2.2m in basic pay — excluding share-based incentives and annual bonuses. Her basic pay at BOI is €960,000, having negotiated an exemption to the €500,000 limit imposed on salaries after the crash.
Across the western world, the pay gap between CEOs and their employees is widening to a record at a time when workers are struggling with the cost-of-living emergency. CEO pay in Ireland may be modest compared to that in the US (Intel CEO Patrick P Gelsinger was awarded nearly $178m (€168.5m) in 2021).
But Manifold’s pay — a record for an Iseq-listed company — meant he earned 390 times as much as the average UK-based CRH worker in the lower quartile of employees, up from 368 times in 2020.
Analysis by the High Pay Centre, a British independent think-tank, found that the CEOs of FTSE 100 earned 86 times the median earnings of UK workers in 2020.
Last week, results of opinion polling it conducted showed that six out of ten workers believed CEOs should be paid no more than 10 times the pay of their middle and low-earning employees. In April, PwC showed that median CEO compensation of the first 50 FTSE 100 companies to publish their 2021 remuneration reports jumped 34pc to 2021.
In the US, bosses of the top 100 companies earned 254 times what their employees earned in 2021, up from 238 times in 2020, according to data company Equilar. There isn’t as much data on the CEO pay-to-worker ratios available for Ireland (CRH is one of the few Plcs to report the statistic).
However, research published in 2019 by the Irish Congress of Trade Unions showed it would take 50 years for an average worker to earn half of what CEOs at leading Plcs command annually. To paraphrase the L’Oreal marketing slogan, are CEOs worth it?
Executive search experts argue that Irish companies have to pay top dollar for top candidates because CEOs carry heavy responsibilities for shareholders and employees and have a complex, high-stress job with a short shelf life. But also because companies compete in a global market for talent, a factor that has only been accelerated by the pandemic.
David Kelly, managing partner of Amrop Ireland, part of one of the world’s largest executive search partnerships, says: “Big Irish Plcs are all internationally focused, so ultimately (pay) comes down to a market rate.
“If boards are looking for a comparable to what [a C-suite executive’s] peers are being paid, it will naturally influence pay. At the end of the day, it comes down to performance and shareholder returns and because we’re dealing with a free market meritocracy, if CEOs don’t perform, they lose their jobs.”
And just like the global economic recovery from Covid-19 sparked a widespread war for talent amid labour shortages, Irish senior executives are also experiencing high demand for their services, Kelly says.
“During the pandemic, it was only mission-critical executive searches that were conducted and then the pressure release valve opened.
“Since the start of this year, we’ve seen a lot of demand in terms of board and CEO requirements and the market is very busy. Amorp has 60 offices worldwide and we do get organisations internationally that are intentionally looking to find Irish executives because there’s a perception that they are of a high calibre.”
Similar sentiments were expressed last month by Flutter chairman Gary McGann after its AGM, before which two proxy advisory firms had gathered about 32pc of the proxy votes opposing the approval of the remuneration report. McGann said the biggest concern among institutional shareholders was that the company keeps its senior executives because it was operating in an “incredibly competitive sector” and that “we’re competing in a global marketplace”.
O’Donnell agrees: “The market for executives in the digital platform space is really hot now and if you’re a proven entity in that space, you can write your own ticket.
“That’s enhanced because executives don’t have to travel back and forth every few days and now they can realistically travel two to three days a month without missing a beat. One former Flutter executive is running an online betting exchange in Romania and he’s based in Blackrock.
“The man on the street might look at Francesca leaving Bank of Ireland despite earning close to €1m and think ‘my God almighty’.
“But the bottom line is that with the banking pay scale as it is in Ireland, the talent will leave.
“You might get exceptions of people wanting to come home to Ireland or people who’ve made their money and want to give something back and can afford to take a pay cut. But really, there’s no green jersey anymore, like there might have been among some executives during the crash.”
However, Micheál Collins, an economist based at UCD’s School of Social Policy, Social Work and Social Justice, points out that CEO pay has been “out of sync” with pay in the rest of the workforce for more than 20 years and that post-pandemic remuneration hikes risk creating an even greater societal divide.
He wants to see greater transparency in executive remuneration, starting with Irish Plcs emulating CRH by publishing CEO pay-to-worker ratios and justifying those ratios.
“There’s no doubt chief executives should be paid well given jobs they do,” he says. “It’s really a question of how much is too much.
“There is no economic evidence that companies gain more by paying their executives higher amounts. So someone on €1m a year who suddenly finds themselves having compensation of €2m will generally bring nothing else to that company. We’re risking creating an elite adrift from society and that is not good for society or democracy.”