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Bossing bosses' pay

Robert Peston | 08:27 UK time, Thursday, 11 June 2009

Is it the best job in the world or the worst job in the world?

Kenneth Feinberg has certainly been given an odd job, as the Obama administration's "Special Master for Compensation".

This particular sensei has the intriguing task of adjudicating on whether senior executives at companies bailed out by the US government are being paid too much.

He'll be a de facto Judge Dredd over the material rewards for the bosses of some of the world's biggest and best-known companies - that have been propped up by American taxpayers - including General Motors, Citigroup, AIG and Bank of America.

If he rules that they're being paid too much, there's no right of appeal: he is the law!

Many of you might well feel that this would be the best possible fun, and that you're unsurprised that he doesn't feel the need to be paid for his own pains.

But I'm sure he won't be capricious or mischievous - and won't be motivated by any unworthy desire to humble erstwhile masters of the universe.

In fact, the US Treasury Department says he'll make his rulings on the basis of whether risk is being properly rewarded, whether the relevant company is paying the competitive rate, and whether the structure of remuneration is likely to increase the value of the relevant business over the long term.

All good sound stuff. But, my goodness, those running Citi, GM and the rest will hate the idea that they've lost what they see as their fundamental right to set their own pay.

Some might point out that Special Master Feinberg's appointment provides a bit of cover for the president's mildly embarrassing decision to drop his previous insistence that there should be a $500,000 cap on the compensation of those running firms that are in receipt of bailout funds.

Apparently, it was too messy to insist on this cap at a time when Congress has slightly different ideas on how to limit bonuses and pay excesses.

Also, whisper it gently, it seems that the world's most powerful man thinks that the US has something to learn from the way we do pay at big companies here in the UK.

The White House is to promote legislation that would give votes to shareholders on corporate remuneration practices and increase the independence of board committees that set executive pay.

This is - in broad terms - the British remuneration system for listed businesses.

Many would say that how we do it here ain't exactly perfect. Quite a few British bankers were handsomely rewarded for breaking their respective banks, for example.

Which probably only goes to show how profoundly sub-optimal the US remuneration system has been.

Comments

  • Comment number 1.

    First allow me to introduce myself
    My name is Judge 100 years
    You can call me Judge Dread

    http://www.youtube.com/watch?v=vUWpovcGjQ0

  • Comment number 2.

    Robert you seem rather obssessed at the moment with the size of pay packets. What would a professional psychologist make of this I wonder...

  • Comment number 3.

    In a World where we believe to a greater or lesser extent that the 'free market' should provide the mechanism for setting every price arguing that pay should be in some way manipulated is a tricky one. But only when one understands that there is no such thing as a 'free market' and its ability to set prices is an illusion and usually used by the powerful to oppress the less powerful do we truly understand what has to be done.

    Everyone, for example would want to be a footballer but the barriers to entry are huge, some a real barriers but most are artificial. Ditto for example Prime Minister! The fault in the market mechanism is addressed by having higher rates of tax fro the better paid, but this only works at the margin.

    I think it is quite feasible to have a maximum wage or income above which level tax (and NI) combined is 100 percent. (We have after all done this in recent history up to 92.5 percent in my memory.) We could keep this level to say 250,000 GBP or whatever and see who left the country - perhaps we would have a better country in the end without those well connected media types who would squeal that they are worth millions a year! We would certainly have a better chance of producing our own footballers and a better chance of a better more successful England Team!

  • Comment number 4.

    There is always an optimum place to intervene in a system to cause the desired change/effect/outcome you want. Crudely setting bosses pay is not it. You need to alter the system 'upstream' so that it governs itself well and delivers the desired outcome you want.

    For me, we need to control the fund managers (who overall can call the CEO's to account because they are the 'big shareholders') by forcing their remuneration to be linked to absolute returns on their funds, not indexed-linked returns. Currently, if they spot some large but poorly run companies, they just need to be underweight in these stocks but track the rest to guarantee to beat the index and receive their generous personal rewards. They have a perverse incentive then to see some/many companies perform badly as they personally will benefit from this situation. Do you think these guys are going to be the ones to lower bonuses/force bad CEOs out? I don't think so.

    Absolute return linked rewards will mean they only get rewarded if their investors (pensioners) do well and so they will be a lot more active in controlling the CEOs (including pay) and driving up the business performance (linking pay appropriately).

  • Comment number 5.

    But not much to be said for our system when there has been enormous inflation in top salaries often in sharp contrast to the performance of the organisation. The problem is the relatively small group of well connected mutual back scratching executives who in effect fix each others pay (I'll be you non exec if your will be mine!) Remuneration committees should have a representative of TU's/consumers and small shareholders. The 'superman' concept of top management is rarely born out by the way large successful organisations work. Executives are expert at survival, manipulation and power games. There must be a better way?

  • Comment number 6.

    2# eddixon
    Totally agree with you.
    Business people require analysis on today's and tomorrows business happenings. Looking backward is time wasting.

  • Comment number 7.

    Punished by rewards!

    It isn't about setting the right level of perfomance related pay, or even about preventing rewards for failure. It is about the very concept of rewards themselves:

    http://en.wikipedia.org/wiki/Alfie_Kohn

    Alas, a society that has focussed on material gain has had to resort to material inducements. As Kohn's books carefully explains, rewards merely lead to the achievement of the target being rewarded. They do not induce beneficial human qualities such as creativity, problem solving and innovation (except in guile of achieving the narrow performance objective).

    Would you want a surgeon, teacher or parent rewarded on a bonus system?

  • Comment number 8.

    Well, I suspect that Mr Feinberg will be very unpopular with some and very popular with some others.

    The issue here is, of course, that high levels of exectuive pay have been argued by some to be a good thing. "These allegedly vastly paid CEO's and the like are just so skilful and capable ... and they might go off elsewhere if we don't pay them a fortune in wages and other benefits".

    The passing of time seems to be making that argument less and less credible.

    Increasingly people are seeing sense in the argument that vast remunerations don't result in CEO's that are 'good for the company', or for the shareholders, as these seem to encourage short-term thinking, the stripping of assets and other 'quick-buck' management strategies and encourages excessive risk taking. It promotes quick profits, over the medium and long term stability interests of a business.

    It also encourages these CEO's to think they are more important than the company / business / bank itself.

    As a manoeuvre towards changing the cult of Amercian business and nudging it in the direction of protecting the mid and longer term interests of companies, and thereby protecting workforces and other corporate assets, I reckon it's a good idea.

    Perhaps Obama is, in effect, stating that he recognises that there are problems with the Anglo-American business culture that has been so vociferously criticised by many in 'continental' Europe and elsewhere for causing the downturn and the banking crisis.

    I would like to think so.

  • Comment number 9.

    #5 watriler

    for many businesses, there seems to be no effective way of either performance managing the day to day activities of the Board Members, or of regulating their reward packages.

    It's not unlike that there seems to be no way that the current politicians are going to create really radical change in the democratic systems.

    In both cases, I suspect that any changes would rather be tinkering around the edges.

    Perhaps some shareholders will start to increasingly take responsibility for the longer term interests of the businesses they have invested in. Perhaps even some pension holders will try to influence their pension fund managers to to that.

  • Comment number 10.

    #6 moorlandwoman

    "Business people require analysis on today's and tomorrows business happenings. Looking backward is time wasting."

    What utter nonsense moorlandwoman. Those who fail to learn from the mistakes of the past are condemned to repeat them. High level compensation packages are not entirely to blame for the pain we are going through now but there are clearly some important connections which justify analysis.

    And #2's comment probably tells us more about him than anyone else.

  • Comment number 11.

    The magic words are `competitive rate'.

    What is the competitive rate for someone posted beyond their level of competence? Should they get more or less than what they received for when they were being competent?

    This is not a scientific process.

    So in the end it will come down to that fine old judgement `is he/she one of us?'

  • Comment number 12.

    eddixon wrote:

    Robert you seem rather obssessed at the moment with the size of pay packets. What would a professional psychologist make of this I wonder...

    I reckon that the population of the UK should be obsessed with pay packets for it is this that is helping cause the demise of a once proud working nation. When footballers celebrities, and other non productive people earn millions while engineers, mathematicians, scientists, nurses, teachers, etc scarcely raise a salary then you are going to find a drift of your best brains into non helpful(in the sense of keeping your nation afloat) but well remunerated jobs.

  • Comment number 13.

    O Robert you are a bard!

  • Comment number 14.

    It seems to me that this is perfectly fair - after all these bankers/car makers are effectively civil servants now. They are not taking entrepenurial risks as they are backed by govt, so don't deserve big pay awards.

    Another solution would be to limit the (total) pay of the highest earner to some multiple of the median wage within an organisation.

  • Comment number 15.

    At a time when the nation is overwhelmed by debt, caused largely by highly paid financial executives, why not just introduce a 90% tax rate for anyone earning over 500k?
    I don't think that the public accept this argument that we have to pay millions to get the "best people". The argument is wearing thin, very thin.
    Perhaps we're all frightened of losing our best footballers.....pretty irrelevant, given the state of public finances.

  • Comment number 16.

    #5 #9 Both writers sum up most of the problems. Small shareholders are little more than an irritant to the Directors and the instituional managers are all passengers on the same gravy train so there is little chance of the boards being brought to book.

    It is a similar problem within the giant cash hungry Public sector, no one is EVER accountable and the old school simply close ranks. PCT,s for example, massive overspends, massive problems delivering the basic service they are supposed to provide but building sparkling new offices and sending their staff (still) all around the world on fancy conferences. Who can stop them,no one, they are a law to themselves and they wrap up results (usually bad )in appalling jargon aand unreadable accounts that even out spin Mr Blairs giant porkies of the past.

  • Comment number 17.

    The market has not been free
    There has been government intervention
    Had these outfits gone to the wall, compensation would have been zero




  • Comment number 18.

    I would say IF he does what we ALL know needs to be done then he would have done a good job. So the jury is out on Judge Dread for the time

    One thing to add, is that if find it strange that the BBC is reluctant to demonstrate transparency with how it dispenses public monies in salleriesyou know it will all come out eventually and the resistance will look like it just has in some other big national body.I would say be part of it before you look a fool and its blown up to be bigger than what it is..personal contracts.puuph.!!

  • Comment number 19.

    I suppose the most important thing to remember before money grabbing, is the job actually worth doing and does it offer any fulfilment...
    [Unsuitable/Broken URL removed by Moderator]

  • Comment number 20.

    By-the-way Robert....transparency...what are you paid out of my (publics) pocket...come on now dont be shy....we'll all know sooner, not later. Start what you are looking for - transparency.

  • Comment number 21.

    Just wondering why you have a pic of Vikram Pandit accompanying this article when he has himself decided to work for one dollar a year until Citi returns to profitability. Do you advocate he is now paid in cents Robert?

    Just the usual blurred article with enough truth to conceal the non-truths.

  • Comment number 22.

    17. At 12:19pm on 11 Jun 2009, mrsbloggs13c2 wrote:
    The market has not been free
    There has been government intervention
    Had these outfits gone to the wall, compensation would have been zero


    ----------------------------------------------


    Well exactly. The market would've taken care of it and average CEO would also have fallen as there'd be a few unemployed CEOS knocking around pushing up the supply.

    The reason the market isnt working is exactly because of the interference and keeping these institutions alive at all costs.

    So no John from Hendon and others, I disagree that the free market doesnt work.
    The problem is that the market hasnt been allowed to fail and bring down average pay.

  • Comment number 23.

    That'll be business as usual then! the ducking and diving of so called Captains of Industry will go on indefinitely! Just a bunch of non-value adding madonna's.

  • Comment number 24.

    What passes for skill during good times is taken as incompetence during bad times. The same policies that resulted in large profits during the good days are resulting in bringing the world economy to its knees now. During the good times they would be a temptation for shareholders to attribute the company's success to the skill of its management. During the bad times, the lack of success would be attributed to incompetence.

    How about luck of the draw?

    It is offensive that senior executives think that they are worth millions, sometimes hundreds of millions, in compensation. Improperly designed compensation schemes reward policies which enhance performance at the expense of longer-term value enhancement, at least in many cases. Often what enhances long-term value actually detracts from short-term performance. Somehow we need to find a way of compensating executives that recognizes this reality.

  • Comment number 25.

    22. CEO "pay" would've fallen...

  • Comment number 26.

    Leaving the job to one person has its weaknesses. Who regulates Feinberg and who makes sure that he isn't taking bribes on the side for leniency?

  • Comment number 27.

    The problem is that a small group of people control the supply, demand and reward for these senior posts. There is no free market.

    Whenever self-regulation doesn't work, as is the case here, society needs to step in.

    Let's start with something simple. Nobody can be made compulsorily redundant if they are paid less than a fifth, say, of the highest paid member of an organisation. This might help to focus the minds of CEOs, and steer them away from exploiting others for their own benefit.

  • Comment number 28.

    20. At 12:27pm on 11 Jun 2009, KJP55555 wrote:

    "By-the-way Robert....transparency...what are you paid out of my (publics) pocket...come on now dont be shy....we'll all know sooner, not later. Start what you are looking for - transparency."


    Actually, as was mentioned recently in the news, many BBC presenters and performers sign a secrecy contract about the amount the wages they receive.

    A situation that somewhat frustrated the National Audit Office a while ago when they were trying to audit Auntie's ability to get 'value for money' in certain operational areas.

  • Comment number 29.

    Any ideas for restricting the rewards to top bosses of large organisations, that are out of all proportion to the rest of employees is welcome news, especially when they are being rewarded for failure.

    I have long held a belief that no matter how good or gifted a person heading up a large organisation might be, that person's basic salary should never be more than ten times the average salery of the people employed by that company. Providing of course the company can afford to pay that figure.

    Because it is important for any large organisation to ensure that all its employees are not only being adequately rewarded in line with what the company can afford, but the correlation in the payments between the different levels of management is a fair and equitable reflection of the roles and responsibilities of everyone concerned with making the business a success. In the case of a performance related bounus payment the same rules should apply.

    In the case of true entreprenurs who work hard and long and put their own money at risk to bring their ideas to fruition then these people deserve all the help and assistance they can get from the government and banks, to help them achieve their objectives. If these people do end up earning obscene ammounts of money then they are to be congratulated and we should wish them well. More importantly if others wish to earn the same kind of rewards then they should be willing to put their money where their mouth is.

  • Comment number 30.

    11. At 11:12am on 11 Jun 2009, stanilic wrote:

    "The magic words are `competitive rate'."

    And if the whole game is rigged by the CEO having his mates on the Remuneration Committee - which if fair(ish) after all because he sits on most of their Remunertaion Committees - then just where is the real open competition?

    The fact is that these situations are often not open - they have been 'managed'. Just like the recent risks to Gordon Brown's continuance as prime minister were 'managed'.

    It really all keeps coming back to "Do these types of Board Members / CEOs or whatever, really do the business or company long term good?".

    If not, then I guess investors should move their money elsewhere - I do appreciate that is difficult if you're talking about money invested via a pension fund where you have little influence over the decisions of the fund manager.

  • Comment number 31.

    #21 VinChainSaw

    Well it most cetainly DOES look a lot more like Vikram Pandit than Kenneth Feinberg.

    (Not that I know either personally!)

  • Comment number 32.

    Did not some UK executives tried to justify their renumerations by referernce to the US level of renumerations? I can see some attempt at decoupling in the coming months and years.

  • Comment number 33.

    #20. KJP55555 wrote:

    "By-the-way Robert....transparency...what are you paid out of my (publics) pocket...come on now dont be shy....we'll all know sooner, not later. Start what you are looking for - transparency."

    None of us has the right to know the salaries of public service employees. Nurses, local government officers, teachers, naval captains and BBC journalists have as much right to privacy in their financial affairs as the rest of us do.

  • Comment number 34.

    At last a politician doing much as I have been suggesting for some months now. What a pity it has to be the Americans who grabbed the idea first, but then again I have been advocating it on American blogs too, and this is the second of my suggestions they have adopted. At least there they listen. Here they are too busy chattering to listen.

  • Comment number 35.

    10# Robiati
    Your right of course I couldn't agree with you more.
    However mistakes of the past keep being repeated and endlessly talked about.
    It has always been part of my lifelong business strategy to constantly look over the parapet at what is on the way, remembering what has past.
    Hence I saw the debt bubble expanding and resulting economic meltdown coming years ago and recognised the internet would change everything and acted accordingly.

  • Comment number 36.

    May I suggest that those complaining about Robert being obsessed with the size of the pay packet should start their comment by admitting whether they are in the "senior executive" class.

 

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