CEO pay in the UK has reached astonishing levels, according to a study, with the median salary for a FTSE 100 boss surging to £4.19 million in 2023. That is an eye-watering figure that means the typical CEO of a top UK company will earn 120 times more than the average full-time worker. A little down from the ratio a year earlier of 124:1, this is still much higher than in 2021 when the gap was 108:1.

How did this high rate of pay for CEOs get so extreme in the UK? According to the High Pay Centre, several factors have combined to produce this astonishing rise. A sharp fall in trade union membership has weakened workers’ power to negotiate better wages, and a business culture that puts investors before employees has driven top pay even higher. Apart from that, after Brexit, the business environment in the UK has compelled many companies to increase the salaries of chief executives in order to retain such important talent from leaving for other jobs with better offers available in the US.

In the US, chief executive remuneration puts UK salaries into a humdrum perspective. Take Sundar Pichai, CEO of Google parent Alphabet, who pocketed $226 million (£177 million) last year, or Nikesh Arora, boss of cybersecurity group Palo Alto Networks, whose haul came in at $151 million. The gap between what the best-paid American bosses take home and their British counterparts is becoming an increasing challenge for UK plc in the global marketplace.

One industry in which this phenomenon is most acute is defense. The potential talent pool for chief executives is much smaller, as it needs to include people with clearances, which greatly reduces the pool from which companies can appoint. In 2020, Rio Tinto’s approach for BAE Systems chief executive Charles Woodburn saw the company he currently works for offer him an additional £2 million in order to tie him down. Only in the past year, Woodburn has pulled in £13.45 million, an indication of the different extents to which companies will go in order to retain key executives.

But how does one actually determine the pay of a CEO? Pretty complex executive pay packages are involved, and base salaries make up only a portion of the total compensation. Bonuses form bulk of their pay, and in turn, can involve a mix of cash and shares. These are further subdivided into short-term rewards based on immediate performance targets and long-term incentives which can judge a CEO’s performance over years.

As well as their basic salaries and bonuses, CEOs get pensions or cash equivalents of pension contributions, company cars, medical insurance, and other perks. New executives may even use their threat of not taking up the offered employment to extract a “golden hello” – a big payment because they have to give up bonuses and shares from previous jobs. Then, of course, there are the “golden handcuffs,” which are incentives to keep them in the firm, and “golden goodbyes,” generous severance packages when they leave.

The decisions about CEO pay are usually made by the remuneration committee of the company, probably part of the board of directors. This board will most of the time contract pay consultants to help in formulating these complex pay formulae, subsequently published in a company’s annual report.

It’s not just a question of numbers; the debate over high CEO pay is one of fairness. Many argue that these enormous pay packets are not fair distributions, and lower-paid workers in a company receive less of a pie. Paul Nowak, general secretary of the TUC, said the latest figures were “disappointing” and urged the government to implement changes in how pay is set so that all workers benefit from a company’s success.

The surge in CEO pay comes at a time when millions of UK households have been feeling the squeeze, with wages failing to match the pace of inflation in recent years. A combination that has further boosted the tide of criticism against high executive pay.

Hannah Peaker, a policy researcher at the think tank New Economics Foundation, said that while many might accept that CEOs will be well paid, their remuneration had “spiraled out of control” and was a prime example of how the current economic system is hardwired for inequality. She further outlined that money spent on massive CEO pay packets could actually be used to upskill workers and boost productivity and therefore improve corporate performance overall.

What then can be done to rein in these high salaries? In the UK, there are provisions for binding votes of shareholders on executive pay policies every three years and advisory votes on annual pay reports.

Only last year, 60% of Unilever investors voted against the pay package of incoming CEO Hein Schumacher, while education company Pearson faced a 46% revolt over plans to increase executive bonuses. These examples show that it is possible for shareholders to push back against high pay, but not always enough is done.

In some cases, executives at the center of scandals can see their pay clawed back or future bonuses canceled. For instance, in one prime example, NatWest has just spent nearly £7.6 mln in potential payouts to a former CEO, Alison Rose, who had to quit after a scandal.

The TUC wants further action from the government to halt excessive chief executive pay. The union says that there should be worker representatives on remuneration committees, and that schemes for bonuses not just be limited to executives but are available to all employees. These changes could help create a fairer distribution of wealth and ensure that everyone does benefit from the success of the companies they work for.