Despite a burgeoning cost-of-living crisis and ongoing market volatility in Europe, CEO pay rises show no sign of slowing down.

According to data from Insightia’s Compensation module, FTSE 350 average CEO total realized pay increased to 3.03 million pounds ($3.77 million) in FY2022, a 12% rise from the 2.7 million pounds ($3.4 million) seen in FY2021.

The U.K. isn’t the only country where CEOs are getting hefty pay packets, with CEOs in the French CAC 40 index boasting an impressive 11.9 million euros ($12.9 million) in average total realized pay in FY2022, a 117.8% increase compared to the 5.5 million euros awarded on average in 2021.

Significant long-term incentive (LTI) awards are to thank for the increase, with FTSE 350 average realized LTI awards exceeding 1.3 million pounds in 2022, up from 944,931 pounds a year prior.

However, with rising inflation and cost-of-living concerns, investors are becoming increasingly unforgiving of outsized executive payouts.

“We have not seen any let-up in the continued increase to executive pay,” Angeli Benham, senior global ESG manager at Legal & General Investment Management (LGIM) told Insightia in an interview. “We also expect companies to be mindful of the pay they offer the general workforce and to ensure they are being paid a living wage. This is particularly relevant, given the financial hardship caused by inflationary pressures on take home pay.”

Getting called out

Earlier this year, proxy advisor Institutional Shareholder Services (ISS) urged investors to reject UniCredit’s proposed CEO pay package and a new incentive scheme at the Italian bank’s annual meeting.

UniCredit planned to hike CEO Andrea Orcel’s fixed salary by 30% while an increase in Orcel’s variable pay, tied to the group meeting various financial targets, meant that Orcel would receive realized pay of up to 7.5 million euros ($8.16 million).

This is not the first time UniCredit has faced criticism for excessive CEO payouts. In 2022, Glass Lewis argued that Orcel’s proposed 6.7-million-euro ($7.36-million) payout was not adequately tied to performance, and that his 5-million-euro ($5.5-million) sign-on bonus made him “one of the best-paid bank executives in Europe.”

At the 2023 annual meeting, UniCredit’s remuneration policy faced 30% opposition, compared to 24.4% opposition a year prior.

“The company has not fully addressed the relatively high level of dissent on the termination payments proposal at the 2021 annual meeting,” ISS said.

In its voting rationale, Castlefield Investment Partners similarly warned that Orcel’s “overperformance in one category [of his performance targets] could offset underperformance in others.”

How are investors responding?

In recent months, institutional investors have been vocal about their intention to vote against outsized CEO payouts that fail to take into account the cost-of-living crisis and rising inflation.

In the first three months of 2023, the 35 “say on pay” proposals subject to a vote at FTSE 350-listed companies won 92.9% average support, compared to 93.5% throughout both 2020 and 2021.

“There is a strongly increased focus on the transparency of remuneration reports and the appropriateness of pension arrangements,” Björn Hinderlich, partner at consulting firm Mercer, told Insightia. “A lack of transparency and excessive pension arrangements are the main drivers for opposition votes.”

On May 3, U.K. consumer goods giant Unilever’s “say on pay” plan similarly faced 58% opposition. Neville White, head of responsible investment policy and research at EdenTree Investment Management said that the fund manager was concerned by the “significant hike in base salary of the incoming CEO [Hein Schumacher] – an 18% premium to the outgoing CEO [Alan Jope].”

“There’s likely to be scrutiny of company remuneration arrangements which may appear, with hindsight, particularly generous,” said Tom Matthews, partner at White & Case, in an interview with Insightia. “For example, share schemes which used weak performance during the pandemic as a baseline, or where companies profited significantly from dramatic increases in energy prices, resulting from the war in Ukraine.”

In Legal & General Investment Management’s (LGIM) 12th annual Active Ownership report, published in April, the fund manager revealed it voted against 56% of all pay-related proposals globally in 2022 “due to companies not meeting its minimum standards for fair and appropriate long-term performance-based pay.”

“We expect our votes against executive pay to remain around the 50% mark in 2023,” Benham of LGIM said.

Considering the persistent increase in executive pay packages seemingly continuing into the distant future, investors are likely to continue rallying against excessive “say on pay” votes and compensation packages.

To learn more about the latest corporate governance trends in Europe, read Insightia’s latest special report, Corporate Governance in Europe 2023 and listen to our accompanying podcast.