March 15, 2017 / 1:59 PM / 5 months ago

Glaxo boss pay cut is a false economy

Emma Walmsley, CEO Designate of GlaxoSmithKline is seen in this undated photograph released in London, Britain, on February 1, 2017. Courtesy of GlaxoSmithKline/HANDOUT via REUTERS

LONDON (Reuters Breakingviews) - GlaxoSmithKline’s chief executive pay cut is a false economy. The pharmaceutical group will pay new boss Emma Walmsley a quarter less than her predecessor, Andrew Witty, on account of her experience. Yet the modest gains seem out of kilter with the potential cost of inexperience.

At first sight, Glaxo is on solid ground in that it is listening to its shareholders, who pushed for a bigger cut to group compensation. And the cut isn’t totally new. Walmsley’s predecessor Witty received an 8 percent cut in base salary, in sterling terms, when he took over from Jean-Pierre Garnier in 2008. Witty, like his successor, was a talented insider but had no prior experience of running a global firm. The group is also cutting back on perks in general, removing a pledge to match the shares that senior executives defer, which would have affected Witty had he stayed. As such, Walmsley’s base salary cut is only 10 percent.

Still, this may be a case where investors are looking at things the wrong way. Witty’s 6.8 million pound total pay last year was still below the 10.5 million Swiss francs paid to Novartis’ Joe Jimenez, equivalent to 8.6 million pounds at the current exchange rate. Moreover, the idea that a new chief executive should receive less pay on account of their experience looks skewed.

Take a step back, and there are reasons to keep things simple. If a candidate’s relative lack of experience is a major issue, they probably shouldn’t get the job. If it isn’t, as seems likely with Walmsley, the implied lower status could create an unnecessary handicap. Moreover, a modest pay cut is unlikely to make up for the damage that a weak chief executive can do. The pay should reflect the job, not its occupant.

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