U.K. Executive Compensation is Lower Than in the U.S., but Let’s Not Be So Quick to Blame Regulation

Last year, Julia Hoggett, the CEO of the London Stock Exchange, declared that ‘We need a constructive discussion on the UK’s approach to executive compensation.’  The sentiment was that the U.K. capital markets had created a hostile environment to high executive pay, which was driving an exodus of talented managers, and their companies, to the U.S. where the market readily supported higher remuneration.  Indeed, in recent years the London Stock Exchange has seen several companies shift their primary listings away from London, and the exchange has missed out on a variety of blue-chip IPOs.  Although numerous reasons have been cited for the London Stock Exchange’s travails, executive compensation has emerged as a prominent factor.  What was once a narrative that U.K. executives were being paid too much has morphed into a debate as to whether they are being paid enough.

Evidence is fairly clear that U.S. executives are paid more on average than their U.K. counterparts, even when company size is taken into account.  With U.K. capital markets policymaking currently displaying a de-regulatory trend, the executive remuneration regulatory regime may have a target on its back.  In my paper, ‘Getting in a Bind – Comparing Executive Compensation Regulations in the U.S. and the U.K.’, I note that the major difference between U.K. and U.S. executive compensation regulations is the approach to ‘say-on-pay’.  In the U.S., shareholders are granted the right to vote on executive compensation, but the vote is merely advisory with there being no legal consequences of pay being voted down.  In the U.K., although shareholders also only have an advisory vote on what directors have been paid in the previous financial year, they also have a binding vote on the policy pursuant to which directors will be paid in future years.  Could the divergence in executive compensation levels between the U.K. and the U.S. be attributed to the existence of a binding vote in the U.K.?

The introduction of the binding vote has in fact coincided with a moderation in at least the rate of increase of executive pay in the U.K., in a manner not observable in the U.S. or during the period when the U.K. only imposed an advisory vote system.  Studies also suggest that since the binding vote was granted to shareholders in the U.K., negative votes show greater correlation with absolute levels of pay, whereas in the past, and in the U.S., it seems that shareholder dissent was more highly influenced by company performance.  It is challenging both politically and morally to put in place regulations that will result in increased executive pay, but if the regulatory priority has shifted towards greater competitiveness, one may presume that executive compensation regulatory reform is next on the agenda.

In the paper, however, I survey the evidence that suggests that regulation may not be the sole, or even primary, driver of lower pay in the U.K.  Notably, advisory votes in both the U.K. and the U.S. have had, and continue to have in the U.S.’ case, real-world consequences.  Companies respond to significant dissent, and in some respects the advisory vote can be considered to be a de facto binding poll.  Companies and directors face reputational consequences from high votes against executive compensation.

Additionally, cultural attitudes towards executive pay differ in the two jurisdictions.  Proxy advisors appear to recommend pay-levels in the U.S. that they will not sanction in the U.K., and a 2023 study by Suren Gomtsian indicates that proxy advisors will give greater latitude in the U.K. to the pay of CEOs from the U.S. or CEOs of U.K. companies with significant U.S. operations.  Reports have also noted the greater levels of opprobrium directed at executives and companies in the U.K. for high pay as compared to the U.S.  Those cultural attitudes, which may well have hardened as the U.K. has faced stronger economic headwinds than the U.S. over the last decade, are just as likely, if not more so, to have impacted executive compensation in the U.K. as regulation.

The outperformance of the U.S. markets over the last 20 years will also have had a sizeable impact on executive compensation.  If advisory votes have had one outcome, it is that executive compensation has become more performance-based over the years.  If remuneration is tied to absolute performance rather than relative performance, executive pay will increase with the performance of the market as a whole.  Furthermore, with equity awards forming an important strategy when it comes to performance-related pay, naturally awards will have greater value if the stock exchange’s performance as a whole improves.  Executive pay may be higher in the U.S. simply because the market has performed better.  Relevantly, one study by Subodh Mishra indicates that rising disparities between U.S. and U.K. executive compensation disappear when controlling for increasing market capitalization and revenue growth. 

I conclude in the paper that the reasons for lower executive compensation in the U.K. than in the U.S. are multi-faceted.  It is too easy to blame regulation, and the narrative around executive compensation is arguably symptomatic of the U.K.’s approach to regulatory reform generally.  Broader market-based and macroeconomic reasons subsist for the London Stock Exchange’s decline.  Advocating that U.K. executives receive higher pay is facing the problem from the wrong direction.  The U.S. may indeed enjoy a different cultural perspective on high pay, but that perspective is grounded in the types of companies listed on the exchange.  With more innovative, high-growth companies on the NYSE and Nasdaq, it becomes easier to justify higher pay as compared to companies where executives are simply managing decline.  Those high-growth companies have also been driving the performance of the U.S. exchanges in recent years, further propelling pay higher.  Let’s not purely blame capital markets regulations when seeking to resuscitate the London Stock Exchange.

The author’s complete article can be accessed here.

Bobby V. Reddy is Professor of Corporate Law and Governance at the University of Cambridge.