The vote to leave the EU has exposed divisions in society that mean reform of executive pay at big companies is urgently required, according to one of the UK’s top fund managers.
A senior executive at Hermes Investment Management, which manages £24bn of funds and advises 42 investors holding almost £170bn, said runaway executive pay had probably contributed to the alienation felt by many people in marginalised parts of Britain who voted for Brexit.
The average FTSE 100 chief executive earns £5m, compared with £27,600 for all UK workers, a pay gap that underscores wider divisions between the populace and the elite, Hans-Christoph Hirt, co-head of Hermes’ stewardship arm, Hermes EOS, said.
Hirt said: “There is a big gap between people on the street and the people who do voting on remuneration and that is not sustainable. Fund managers are waking up to the fact that they work for pension funds and the man on the street. The discussions have been ongoing but [Brexit] will give a different dimension to it.”
He added: “Bridging the gap in pay is the equivalent of bridging the gap between Westminster and east England.
“There is a similarity between the two situations. The pay gap is growing and growing and it is comparable to the situation in north-east and east England where people feel out of touch and not represented.”
Last Thursday’s vote to quit the EU has been blamed on a wider alienation of working class people outside prosperous city centres who have felt left behind by globalisation and rising prosperity for top earners.
Hirt said bosses’ pay is too high and too complicated and that remuneration committees should stand up to senior executives over pay levels.
“The discussion should focus more on what is necessary and not what is the maximum possible or acceptable. If they see an outcome that doesn’t feel right they should use discretion to make an adjustment.”
The Resolution Foundation said on Tuesday that weak income growth and rising housing costs had caused living standards to stagnate for low- and middle-income families over the past decade. The squeeze on living standards helped spur disillusionment with the political and economic status quo, the foundation said.
Hirt said the recent spate of rebellions against excessive pay at companies’ annual general meetings showed the investment industry was starting to take the matter seriously and that Brexit would increase pressure for pay to be reined in. Protests included votes against pay at Shell and Smith & Nephew and a big rebellion against the £70m pay deal for Sir Martin Sorrell at WPP.
Hermes’ comments expand on a warning from another big British fund manager, Standard Life, which said on Tuesday that Brexit underlined the dangers posed by the gap between the rich and poor. It said the effect would be felt in the US, where populist resentment of political elites has risen, as well as in the UK.
“The vote has highlighted deeper fault lines in the global economy. Increasing income inequality over recent decades has fostered populist anger across many economies. A failure to address these challenges raises the risk of these types of political shocks,” Standard Life said.
Brexit also prompted the US financial houses Bank of America and Pimco to turn their attention to inequality. Bank of America, the second-biggest US bank, said Britain’s economic recovery had been unequal and that the vote to leave the EU was the biggest rejection so far of the age of inequality.
Pimco, the $1.5tn (£1.12tn) fund whose advisers include Gordon Brown, said if populist or nationalist parties did not come to power, Brexit would still increase pressure on governments to address inequality and adopt protectionist policies.
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