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People and MarketsCommentGC View

To fix IPOs, make markets liquid not managers

Banknotes of British pounds sticking out out of the businessman suit pocket. Money in the pocket of business suit

Higher CEO pay will increase inequality and ignores the real problem facing London's equity market, liquidity

Concerned citizens worried about the future of London’s IPO market have pushed executive pay back into the limelight.

Leaders of New York-listed companies can get away with significantly higher compensation than UK top managers, and some fear that this is driving entrepreneurial Brits and their companies offshore — especially growth businesses.

If a founder of a biotech start-up can get a greater personal reward for years of hard work by listing in the US, that is a very powerful incentive to ditch London, they argue.

Julia Hoggett, chief executive of the London Stock Exchange, is one of those concerned citizens. In early May, she called for a “constructive” discussion about helping companies attract talent. City minister Andrew Griffith backed her in a speech two weeks ago.

The numbers don't lie. Chief executives of FTSE 100 companies received median annual compensation of £4.1m in 2022, according to a report by Deloitte, while the median pay of their counterparts at S&P 500 companies was $14m (£11.4m).

There are several explanations for the gap. Share incentives play a bigger role in the US than in the UK and bonus structures are different. Shareholders can also vote against pay packages for CEOs in the UK, a power they do not have in the US.

Beneath it all lingers a cultural divide. People in the UK and Europe tend to be more focused on the perceived fairness and proportionality of pay — there is a sense that “too much” is possible. For companies that means that paying its top managers more comes with a higher risk of media scrutiny and public outrage.

They key question, according to a corporate compensation lawyer, is whether the UK is actually gearing its economy to growth, and whether that is really the ultimate goal of the country's pension funds. "Or are we moving to a more socialist capitalism, a model of fairness, stability and less disparity in our society," she continued, asking if the cost of that move might well be that growth.

"We [the UK] need to be in the first camp around growth because we will have a huge leak of talent and entrepreneurialism to other countries," she continued. “If we abandon the idea of celebrating success and driving new businesses forward, in 15 years we will be in quite a disappointing place.”

Sources would argue that to promote inequality in the name of growth will not foster a balanced economy.

“Growth without any moral principles guiding it can lead to terrible destruction and often has in the past,” said Thomas Clarke, professor of management at UTS Business School in Sydney and a corporate governance and sustainability expert.

While UK companies are struggling with a talent drain, this begins far below the chief executive level. If businesses have money to spare, another approach that could be considered would be increasing salaries across the board and encouraging talented, young professionals to build out their careers and lives in the UK.

This is not a new discussion. The executive pay gap between the US and the UK has been debated for two decades. Only recently has it been lauded as a scapegoat for the equity market's woes.

GlobalCapital has asked numerous market participants what is wrong with the UK IPO market over the past few months, and how they might suggest fixing it, but not once has anyone said that the problem is CEOs not having high enough salaries.

London’s issue is a lack of liquidity. In January 2023, Nasdaq had a trading volume of $1.7tr, more than 20 times the LSE’s trading volume of $82.6bn during the same month, according to data by the World Federation of Exchanges.

It is ambitious for a country of 69m people to even contemplate trying to compete with a market of 337m, and impressive it has remained in the conversation for so long. Of course Brexit did not help, with the UK now facing battles on two fronts.

“The only way to fix the liquidity is to make a single European exchange,” said a senior ECM banker in London, although that idea — encorporating London — could not be much further from a possibliity at this stage.

However, that is no reason not to improve what can be improved. London’s January trading volume represented 2.5% of its market cap, according to the WFE. On the Nasdaq, 9.4% of the exchange’s market cap was traded.

Reforming retail participation in London’s IPOs, capital increases and secondary blocks is still in the early development stages. The Capital Markets Industry Taskforce — led by Hoggett — is looking into ways to create a more welcoming environment for UK growth companies in the first rounds of funding, and to encourage domestic institutional investors to engage with them later on.

These measures attack the problem at its core. Substantial change will require some trial and error. It will take years.

But so would the kind of deep cultural shift required to get a country on board with allowing companies to make small groups of managers richer, hoping that this will somehow save London’s capital markets.