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The Covid Job Retention Scheme of the UK government went live last week and a number of companies and businesses in the UK are accessing that scheme to pay their furloughed employees due to liquidity crunch. The scheme is being availed by most of the businesses that have been not been operating during this lockdown period. Industries such as restaurants, bars and fashion retail firm, that have struggled and are facing a massive liquidity crunch have used this and the government estimates that by the end of the scheme period in June 2020, around 8 million people would claimed the benefits of the programme to support companies that would not be able to pay wages without operating through this period.
There have been news around the fact around 140,000 people applied for the government’s furlough scheme, and even though the number was lower than what had been previously anticipated, it has been expected that the total value of claims could exceed the previously made estimates on part of the department of treasury.
Meanwhile, a report from the High Pay Centre revealed that since 2015, the Chief Executives at 18 FTSE 100 listed companies furloughing thousands of employees raked in salaries and bonuses in excess of £300 million, or more than £3 million each. There are growing demands for highly paying executives to play a greater role in shouldering the financial burden of the crisis, which would eventually hit taxpayers hard behind the back. The government's work retention program looks likely to cost British taxpayers over £40bn in only the first four months of its life, although some economists think this quarter could reduce the economy by over a third.
How are UK executives responding to the lockdown?
Report by the High Pay Centre found it highly unlikely that companies receiving public money would continue to disproportionately channel private income to a limited number of mostly very rich people in the form of very large chief executive salaries and dividend payments.
Source: High Pay Centre
The data has revealed that approximately 37 per cent of FTSE 100 companies and 31 per cent of FTSE 250 companies (equivalent to 33 per cent of all the FTSE 350 companies) reduced their executive salaries. The most common measure implemented was to slash CEO wages between 25 per cent to 33 per cent, but it is not always made clear that this constitutes a reduction to the annual pay or on a pro-rata basis for the length of the lockdown.
Just 13 per cent of companies, which make up for 35 per cent of businesses that will undergo some form of executive pay cut have cancelled or decreased the bonus or long-term incentives that make up the largest component of executive pay benefits. Some of the announcements apply to cash bonuses even in these cases, meaning that benefits/bonuses may also be paid in shares. Hence, the impact on overall pay is unknown. Usually, incentives and long-term retention rewards are tied to corporate profits and shareholder returns. However, the use of additional operating metrics, the potential for rebounding economies and the fact that success is always calculated in relation to competing firms, rather than in absolute terms, means it is not unavoidable that pay awards will decline immediately as a result of the recession without businesses taking unilateral steps to minimize them.
This highlights the challenge in deciding whether or not pay cuts are significant cost reductions or substantive gestures in unity with colleagues and broader society. Assuming an £850 thousand salary and £1.4 million bonus (the FTSE 100 medians), a 20 percent 3-month pay cut will reflect a £42,500 loss to the CEO. A 30 per cent cut of average salaries and the cancelation of bonus bonuses would result in a loss of £1.65 million.
To put it in context, At least 18 per cent of FTSE 100 firms and 26 per cent of FTSE 250 firms (equivalent to 23 percent of FTSE 350) will take advantage of the 'Coronavirus Job Retention Scheme' which means that workers will be put on furlough with 80 percent of salary costs covered by public funds. This figure is likely to grow and could be higher already. A majority of FTSE 100 companies assessed by the High Pay Centre refused to comment about how they will use the system. Over the past five years (financial years ending 2015-2019), the FTSE 100 companies that High Pay Centre has discovered have now furloughed staff using the coronavirus job retention scheme have:
- made CEO pay awards worth £321 million
- paid out £26 billion in dividends
- made £42 billion in profits.
Shareholders and Politicians want executive pay cuts
Political leaders and prominent UK shareholders have proposed that the upper level executives should share the burden by taking substantial pay cuts as their companies lay off hundreds of thousands of workers, some are being put on the furlough scheme which is using public funds as well as are slashing dividends. As part of an effort to save cash and show unity with staff, at least three dozen of the largest businesses in the UK have reported pay cuts for board members and senior executives, according to an report by the Financial Times, with an average 20 per cent cut in salary. Others have gone further, with companies including pest controller Rentokil and property company Taylor Wimpey also cutting benefits and rewards for long-term incentives. But others have largely abstained from corporate austerity, although some of the pay cuts rendered trivial compared with those levied on the larger workforce.
The latest crisis brings into question the wisdom and fairness of extraordinarily high executive-pay levels. The huge, concerted public initiative to maintain jobs and wages and address the immense challenges facing the health service highlights the importance of collective efforts to create and maintain socio-economic stability, indicating that the narrative of heroic individual entrepreneurs or business leaders is somewhat overestimated. There is also an ongoing consensus, understanding the work done by traditionally derided employees as 'unskilled' and agreeing that they deserve better pay. It appears this agreement is debatable amongst the entire political and ideological spectrum.
