The past year has seen extensive discussion regarding the competitiveness of the UK capital markets, and in particular the influence of the ‘transatlantic pay gap’, which many view as limiting UK public companies’ ability to attract, retain and motivate executives. This quantum disparity reflects significant longstanding differences in how executive remuneration is structured and delivered on either side of the pond.
During the 2025 proxy season, shareholders at some UK companies will be asked to consider adopting a more U.S.-style approach. In October 2024, the Investment Association issued an update to its Principles of Remuneration emphasizing the importance of flexibility, and a number of FTSE issuers have proposed to adjust their executive pay programs to be more competitive, both through increased quantum and the relaxation of traditionally robust structural safeguards.
With longstanding UK norms in question, this post explores the origins of the transatlantic pay gap, and its relationship to the wider governance regime.
Why Does the Transatlantic Pay Gap Exist, and Persist?
Local market standards and expectations for pay are set by local investors, public companies, stock exchanges, regulatory bodies, and governments. UK pay norms, in particular, reflect the strong influence of investor organisations such as the Investment Association, along with the historical willingness of the London Stock Exchange, regulators and industry bodies to establish and maintain robust standards in the interests of investors and the broader public. Historically, EU regulations have also influenced UK pay – most notably via the so-called (and now abolished, for UK companies) banker bonus cap.
“For the largest companies, total remuneration levels in the UK appear broadly comparable with other European countries and well below American levels.”
This 1995 finding, from the Greenbury Report, illustrates that the tendency for U.S. companies to pay their executives significantly more than UK and European peers is not a new phenomenon. The Greenbury Report was itself the product of a committee formed by the Confederation of British Industry at the behest of Conservative MP and Board of Trade chair Michael Heseltine in response to public concern over the compensation of public company executives, illustrating the central role that the government and local stakeholders have played in the development of UK remuneration and corporate governance standards.
Greenbury went on to note “marked differences in [the] composition” of executive remuneration between the U.S. and other markets. In particular, as of the early 1990s “performance-related elements account[ed] for a high proportion” of U.S. total pay compared to the UK and Europe.
By the “performance-related elements” of U.S. pay, Greenbury principally referred to share options. Indeed, explaining why executive compensation is so high at U.S. companies, and in effect where the pay gap came from, is arguably as simple as tracing the U.S. market’s early adoption of equity awards in the late 1970s and 1980s. Explaining why the gap persists decades later, despite the widespread adoption of equity incentives across the UK and Europe, is more complicated – but share options, including regulatory guidance around their usage and treatment under local tax codes, are a good place to start.
Options remain one of the primary components of U.S. executive awards, enjoying tax-advantaged status. In contrast, despite burgeoning popularity in the early 1990s, they are rarely included in UK remuneration policies — largely because the Greenbury Report raised concerns about their use as a vehicle for incentives, even prompting a change in law that further discouraged options by making them subject to income (rather than capital gains) tax.
The situation should not be oversimplified – but neither should the far-reaching impact of these factors be underestimated. The vast majority of UK companies have long followed the recommendations of Greenbury, and later the ABI/IA’s Principles of Remuneration, in delivering executive incentives via performance shares subject to stretching targets, clear individual limits and long-term performance periods. By contrast, U.S. companies’ option awards were harder to value (and thus to set comparable limits on), typically subject to no further performance criteria except an increase in stock price, and fewer time-related exercise restrictions.
As a result, although the remuneration of UK executives certainly grew over the late 1990s and the 2000s, their incentive payouts required sustained long-term achievements to vest, included disclosed (and generally homogeneous) size limits, and have been subject to annual investor voting scrutiny from 2003. In contrast, the absence of similar safeguards for U.S. awards allowed executives to capitalize on short-term profit boosts (e.g. from job cuts, restructuring, and/or creative accounting) throughout an extended period of unprecedented market growth, with no formal channel available for shareholder oversight. By the time the global financial crisis interrupted that growth and focused U.S. regulatory attention on giving shareholders a “Say on Pay”, the remuneration gap identified by Greenbury more than a decade prior had significantly widened.
Different Approaches to Pay Regulation & Stewardship
Over the past three decades, the UK has developed arguably the world’s most robust corporate governance regime, including strong shareholder rights on executive remuneration, principally through a succession of stakeholder-led reviews. By contrast, U.S. regulatory developments on executive pay have typically come later, been limited in scope, and focused on curbing egregious practices (e.g. backdoor repricing, executive loans, the split dollar life insurance loophole etc.) rather than promoting market standards. For example:
- Independent remuneration committees were recommended by Greenbury in 1995, but did not appear until 2003 in the United States.
- Advisory votes on executive remuneration were introduced in 2003 in the UK (and must be held annually), but not until 2011 for U.S. companies (which can opt to hold them once every three years).
- Binding votes on remuneration policy were introduced in 2014 for UK companies, but do not apply for U.S. companies.
Moreover, even where equivalent rules and structures are in place, they have not had an equivalent impact on pay quantum and best practices. One potential explanation is the willingness of UK stakeholders to actively self-regulate with investor and public interest in mind. For example, Greenbury was conducted “in response to public and shareholder concerns about Directors’ remuneration”, and in 2014 the coalition government introduced binding policy votes because “business leaders and investors recognise … that the link between pay and performance has grown weak; and the constant, ratcheting up of executive pay is unsustainable.” By contrast, efforts to implement U.S. reforms have faced extensive corporate lobbying and political opposition (e.g., the Financial Accounting Standards’ Board’s failed 1994 attempt to enact rules on option accounting). The willingness of UK press and, historically, politicians to apply pressure in response to corporate scandals also appears to have been a factor.
This may simply reflect a concentrated market. In the period when UK remuneration standards were established, insurance and pensions controlled roughly 40% of shareholder equity, giving groups like the Association of British Insurers significant influence — for example, through its Socially Responsible Investment Guidelines, which launched in 2001 and eventually gave rise to the Principles of Remuneration now maintained by the Investment Association, and through its meeting-specific “amber-” and “red-top” alerts, which serve to rally investors against concerning practices.
Indeed, the expectations, behaviour and commitment to good faith engagement of UK investors and public companies have been determinative in the evolution of market pay norms. Take for example the first UK remuneration revolt, at GlaxoSmithKline, which occurred in 2003 during the first year of advisory votes. Despite failing by less than 1% with no legally binding effect, the proposal prompted amendments to the company’s remuneration policies and changes to its boardroom, while immediately setting a market standard for executive severance.
By contrast, when U.S. companies suffer a shareholder revolt, for example on the nine-figure “mega-grants” that have become common in recent years, many expressly or effectively disregard shareholder concerns by going ahead with the awards anyway, in some cases increasing performance targets without reducing the payout or merely promising it’s a one-time situation that won’t be repeated; or by making non-material changes and resubmitting the award to another shareholder vote the following year. Nor is this relatively low level of responsiveness limited to pay — for example, it is common for U.S. public company directors to remain on the board despite failing to receive majority shareholder support.
How Glass Lewis Approaches UK Remuneration
Some of the pay gap discourse has focused on the role of proxy advisors such as Glass Lewis, which facilitate proxy voting for institutional investors and provide research, analysis and voting recommendations. But proxy advisors do not set governance and pay norms – instead, their policies reflect the standards and expectations set by local market investors, public companies, stock exchanges, regulatory bodies, and governments.
While Glass Lewis applies global pay principles, such as fostering close alignment of remuneration and performance, we closely tailor our benchmark approach to each country’s relevant regulations, practices, corporate governance codes, and stewardship codes. For the UK, our benchmark approach to executive pay reflects – and evolves, in step with -- standards set out in the IA Principles of Remuneration and feedback received during extensive discussions with a wide range of market participants, including institutional investor clients, public companies, academics, and subject matter experts, among others, along with active participation in panels, working groups, and industry conferences. In response to the IA’s 2024 updates to its Principles of Remuneration, we updated our UK Benchmark Policy Guidelines last November to clarify our approach to ‘hybrid’ incentive plans and pay increases aimed at improving competitiveness with U.S. peers.
Ultimately, Glass Lewis’ benchmark approach for UK public companies reflects market expectations, not the other way around. Clients with different expectations can choose to apply other voting templates, or their own custom policy. Indeed, the overwhelming majority of our clients ultimately make their own vote decisions. Rather than relying solely on proxy advisor research and recommendations, institutional investors typically use them as one of many inputs, in particular to identify outliers that warrant further attention via comparison to local market peers and practices.
Is the Pay Gap a Red Herring?
While some UK investors have already expressed a willingness to consider larger pay packages and softer structural safeguards, at least for certain companies, the upcoming round of proxy votes – and how companies respond to the results -- will provide a clearer picture of the landscape going forward. In the meantime, it may be worth considering whether higher remuneration levels would in fact meaningfully improve UK capital market competitiveness.
Despite the increasing volume of the pay gap discussion, there is little evidence that UK executive talent is abandoning ship. Meanwhile, the decline of IPOs and broader concerns with the functioning of UK equity markets go back decades, arguably reflecting the tax regime, regulatory changes and the burdens associated with listing (see sections 2.6-2.17 of the 2012 Kay Review, another example of the UK’s historically proactive approach to capital market regulation) rather than uncompetitive executive pay. Ironically, many of the largest UK listings in recent decades have come from overseas companies attracted by its robust governance regime — one that is now in the process of being dismantled.
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