The increasingly generous pay on offer for CEOs – and just how out of kilter it usually is with the average worker’s wage – is one of the most contentious issues that HR leaders face.
But do CEO-employee pay ratios really matter as much as trade unions and commentators would have us believe? The first UK-specific study of the topic, led by academics from the University of Westminster, suggests that a CEO earning multiple times more than their staff might, in fact, be a sign that a business is functioning in a healthy way.
That’s positive news for some of the country’s biggest C-suite earners. CEOs of FTSE 100 companies took home an average £4.22m in 2024, some 113 times more than the median full-time UK salary of £37,480. As the High Pay Centre likes to highlight each January, that means they make more in three days than many of their staff do in an entire year.
Brian Niccol, who took over as the CEO of Starbucks in September 2024, could earn $96m (£71m) including stock options in his first year. That is 9,600 times more than an average barista in the global coffee chain and 2,300 more than the median US Starbucks pay packet.
Does a high pay ratio damage company culture?
To many, such figures are unacceptable and unscientific. “High pay would be a good thing if individual performance was entirely measurable and if someone got to the top because they contributed the most to the company in a way that could be determined to the fullest extent possible,” says David Bolchover, who is the author of Pay Check, a book about CEO remuneration.
Scrutiny of high pay and its unwanted side effects has increased since gender pay reporting was introduced in the UK, adds Bolchover. Apart from in some roles such as sales, he feels that it’s difficult to prove that being paid more leads to better performance – or vice versa. “Instead, you see people jockeying for position, forming alliances, assuming a particular image that suits the workplace and working their way up – you get large numbers of very able people devoting their lives to playing a game,” he says.
But the latest study, published in the journal Corporate Governance, uses a decade of data from 250 British companies across nine industries to suggest a positive correlation between CEO-employee pay ratios with return on equity and return on assets, two widely used measures of corporate performance.
The research also finds a positive link between high CEO salaries and a business’s productivity, though it suggests all these effects are less pronounced when the pay ratios are at the highest end. “High CEO-employee pay ratios will motivate the CEO to make every effort to ensure successful company performance and other employees will be motivated to perform better,” the authors conclude.
Why setting executive pay is rarely straightforward
Management guru Peter Drucker famously suggested bosses should earn no more than 20 times more than their lowest-paid employee. Today, however, such a ratio seems quaint.
AstraZeneca CEO Pascal Soriot, the FTSE 100’s best-paid business leader, earned £16.85m in 2023. That was 182 times more than the average employee at the organisation, although the figure was an improvement on his 482:1 ratio for the previous year. HSBC’s Noel Quinn (£10.64m), meanwhile, boasted a 168:1 pay gap – and even Hein Schumacher, CEO of ethical business poster child Unilever, came in at 81:1 in 2024.
Those bosses look relatively down at heel compared to their American compatriots. In 2024, Schroders, the asset manager, claimed that typical pay for CEOs in New York was $7.2m (£5.3m) compared to $1.4m (£1m) in London. The average pay ratio among the S&P500 index of listed firms is 268:1. Even with his sizable wage, industry analysts have labelled Soriot “massively underpaid” when compared to rival CEOs in the US pharmaceuticals sector.
While some oversized pay ratios are hard to defend, Katherine Watkins, an HR leader and consultant who has worked with boards on reward strategy, argues that context matters. Remuneration committees should consider the leader’s skills, background and experience, as well as analysing internal and external career networks and broader industry performance metrics. This data can help to ensure salary packages are constructed as objectively as possible and are defensible.
HR’s role in explaining pay ratios
Without having extensive experience in remuneration, explaining pay ratios can prove a tricky task for HR departments, adds Watkins. Where HR can really add value, however, is making sure the leader in question is seen a real person by employees rather than viewed as an identikit executive. This can help to make both executives and their pay more relatable.
Watkins describes the newest contingent of employees entering the workforce as “gregarious” and “energised”. So it really helps if a CEO is a people person, especially when difficult messages need to be communicated. “It calms people down,” she says.
Though the Westminster study does offer some justifications for richly rewarded leaders, there remains no scientific consensus on whether high pay drives performance. This is partly due to so-called tournament theory, where high executive pay can be viewed as aspirational for other employees in an organisation – but it can also corrode trust and leave employees disengaged.
High pay would be a good thing if individual performance was entirely measurable
Harvard Business School research from 2018 suggested that if CEO pay is properly explained – and if individuals see their own pay as fair – employees are less likely to be angered by astronomical pay ratios. Yet other studies found that high CEO remuneration is initially a byproduct of corporate performance and over time becomes a race to the top rather than a reward.
And in a survey by the High Pay Centre, 29% of the British public thought CEOs should receive no more than five times their average employee’s salary. Only one hundredth of those surveyed thought a 100:1 ratio was justifiable.
Duncan Brown, who is an independent reward adviser and author, believes that successfully setting CEO pay involves balancing three key factors: affordability, market comparison and fairness within the organisation. That final point, he adds, is becoming increasingly important. HR professionals who find their CEO’s pay ratio increasing should liaise with colleagues in the communications team to get the messaging right.
“Communications teams are key because they look at these issues from a far more external point of view,” says Brown. “They know where the boundaries are and they’re used to putting a positive spin on things.”
Brown points to the ongoing requirement for 1,600 of the largest listed UK firms to report their CEO pay ratios as only the start of increased transparency on the topic and suggests they will need to open up to further scrutiny. He adds: “The default in the vast majority of private sector organisations is secrecy. They need to start telling us more about pay because governments, sooner or later, will force them to.”
The increasingly generous pay on offer for CEOs – and just how out of kilter it usually is with the average worker’s wage – is one of the most contentious issues that HR leaders face.
But do CEO-employee pay ratios really matter as much as trade unions and commentators would have us believe? The first UK-specific study of the topic, led by academics from the University of Westminster, suggests that a CEO earning multiple times more than their staff might, in fact, be a sign that a business is functioning in a healthy way.
That’s positive news for some of the country’s biggest C-suite earners. CEOs of FTSE 100 companies took home an average £4.22m in 2024, some 113 times more than the median full-time UK salary of £37,480. As the High Pay Centre likes to highlight each January, that means they make more in three days than many of their staff do in an entire year.
