Earlier this month supermarket Tesco published its 2024 annual report, which showed a 159% surge in pre-tax profits to £2.3bn, up from £882m. Chief Executive Ken Murphy’s remuneration leaped from £4.4m to £9.9m.
The trade press reported the news with phlegm. However, social media burned with general outrage and Murphy himself was lambasted for greed. Some pressed for boycotts whilst one union leader distilled popular sentiment when she called the pay increase a slap in the face for workers and customers.
How ordinary is the share of Tesco’s CEO?
The chief executive’s remuneration for the year comprises fixed pay of £1.6m, a bonus of £3.4m and a Performance Share Plan (‘PSP’) payout of £4.9m. More than half of the total is not cash in the bank, but deferred incentives linked to stock and business performance, the norm for quoted companies.
There is no evidence that in making this award the Tesco board acted wrongfully, or beyond what is usual. The Directors’ remuneration report (which spans 25 pages of the annual report) clarifies that the pay reflects, as it should, a range of stakeholder commitments.
The remuneration report was supported by 92.4% of shareholders at the 2023 annual general meeting (‘AGM’). What’s more, the underlying policy, which compares with those of Tesco’s FTSE 50 peers, was approved the previous year by 92.0% of shareholders.
In short, Tesco’s remuneration strategy is benchmarked to known standards, is agreeable to owners of the company, complies with the government’s reporting regulations, and is informed by obligations to diverse stakeholders. What, then, is the problem?
It is tempting to argue about one pay packet for one executive at one company. But quantifying value in such a complex system is moot.
The question of worth has no answer
One question asked in the public square is whether a director can be ‘worth’ such remuneration.
The Tesco chief executive presides over a business that employs more than 330,000 people, with responsibility for some 4,500 stores. The company is pivotal in a supply chain that spans the globe and, as we saw during Covid, provides an indispensable service to the country.
The complexity of this system is unimaginable. When we consider multiple stakeholders, diverse notions of value and an environment in constant flux, on a whim we can defend compensation at one-tenth or indeed ten times the level set by the Tesco board.
It is tempting to argue about one pay packet for one executive at one company. But quantifying value in such a complex system is moot: no formula yields an unambiguous answer. Numbers taken out of context, as this debate shows, elicit more emotion than insight.
High executive pay
We likely can agree that a pay packet of £10m is ‘high’, by UK and less so by US standards. Tesco itself states that both target and maximum remuneration sit at the top of the median to upper quartile range for its FTSE 50 benchmark.
Mindful of global competition, the London Stock Exchange has called for an uplift in executive pay. High remuneration, the exchange argues, helps companies recruit the best people and provides incentives for outcomes that benefit all stakeholders.
But not everyone agrees. In March 2024, over 20 academics wrote an open letter to investment firms on the risks of high remuneration. They cite a weak link between executive compensation and business performance. Further, pay gaps may lessen employee engagement and productivity, while inequality also brings adverse socioeconomic effects.
Large corporates may have room to question their remuneration policies. Still, beset by ambiguity, in an inefficient labour market and with a tiny pool of candidates, boards face risks in any departure from the norm.
Tesco value for stakeholders
The worth of a management team may be assessed against value the company creates for stakeholders. With Tesco we – inevitably – find both good and less good.
Good performance
To illustrate, a healthy balance sheet and strong cash flow give Tesco the resources to create opportunity across its value chain. Relative to last year, the company has reduced Scope 1 and 2 carbon emissions by 13%.
Over 12 months Tesco has offered shoppers 4,000 price cuts, with an average saving of 12%. More customers than last year would recommend Tesco to a friend or colleague, with its net promoter score (NPS, fans minus critics) rising by 4 to 19 points.
For employees, Tesco recently increased hourly pay by 9.1%, to £12.02 per hour, which the trade union Usdaw describes as an ‘inflation-busting increase’. Citing strong business performance, the firm made ‘thank you’ payments to hourly-paid workers. The company offers enhanced parental leave, flexible working from day one, and a virtual GP service. Most employees (84%) recommend Tesco as a ‘great place to work’, up from 82%.
The world endorses a move toward wider stakeholder returns. But quoted firms are trapped within an institutional and economic system that routinely privileges shareholders.
Less good performance
On the other hand, Tesco’s intensive chicken farming along the River Wye has been condemned as a source of pollutants. On Scope 3 emissions, the company is not alone in stating ambitions with results to follow. Small retailers complain that prices at Booker, Tesco’s own wholesaler, are higher than those available in its stores.
The RAC in May warned that supermarkets (not only Tesco) were not passing on the lower wholesale costs of fuel.
And on the point of employee pay, some weeks ago many Tesco workers received less than minimum wage because the company chose not to increase wages until its pay period starting 28 April.
Easier said than done
Advocates of Tesco can show that, under tough conditions, the executive team has generated value for diverse stakeholders. Critics, likewise, can argue that the company has a long way to go.
The black-and-white of heated discourse does not exist. Society is left with a moral question and boards with a moral decision. To joust with figures and percentages is unlikely to yield a ‘right’ answer.
The world endorses a move toward wider stakeholder returns. But large firms are trapped within an institutional and economic system that routinely privileges shareholders. Consumers are fickle and global value chains are complex and hard to direct.
Solutions may be ‘obvious’ to outsiders – not least to keyboard warriors on LinkedIn – but organisational momentum is often in the wrong direction and inertia sits around every corner. Value creation will remain a work in progress.
Anyone can take potshots from behind a screen; but not everyone can run a company of 300,000 people. Similarly, thoughtful outsiders who are not embroiled in running a global business can bring a fresh and liberating perspective.
Change across a complex system is possible when those with diverse experiences come together with curiosity and in a spirit of cooperation – to build up and not to tear down.
