Will shareholders crack down on executive pay?

 

David Cameron: "Big rewards when people fail make people's blood boil"

David Cameron's remarks to the Sunday Telegraph that "the market for top people isn't working" and "needs to be sorted out" could have been said by Margaret Thatcher 30 years ago.

But she would probably have meant something completely different: that company executives were earning too little, whereas her Tory successor thinks many of them now earn too much.

So has the current prime minister been converted to the kind of so-called "levelling down" of pay that Margaret Thatcher regarded as the cancer destroying the competitiveness of the British economy?

Probably not.

Nodding to a traditional Tory constituency, he said: "I've been struck that you now get the criticism of pay at the top, and of bank bonuses, from a business audience... There is a very strong sense that small businessmen and women working hard, grafting away, building a business and not paying themselves huge amounts of money are furious with these rewards at the top for people who aren't taking the sort of risks they're having to take."

Mr Cameron is pre-empting a statement, to be made in a couple of weeks or so by Vince Cable, the business secretary, on executive remuneration, the culmination of a consultation by the Business Department.

Mr Cable will be relieved, and big companies a tad concerned, that Mr Cameron has set the bar for reform quite high.

So it's now clear Mr Cable will propose that shareholder votes on companies' remuneration policies should become binding votes, as opposed to being merely advisory, which is the current position.

I also understand that the business secretary will pave the way for greater transparency on executive pay, including making it compulsory for businesses to publish some kind of ratio showing the relationship between senior executive rewards and the earnings of typical employees.

And there's a high probability he will insist that companies with large UK operations should appoint a representative of employees to the remuneration committee that decides executive pay; a reform that most big business would loathe.

Merry-go-round

So what, for David Cameron, has gone wrong?

"We've got to deal with the merry-go-round where there's too many cases of remuneration committee members, sitting on each other's boards, patting each other's backs, and handing out each other's pay rises," he said. "We need to get to grips with that."

But it's not clear that this kind of blatant cronyism in the boardroom still exists, as per a compelling analysis by Manifest, which advises investors.

Here are the important numbers:

1) Only 52 FTSE 100 directors sit on another FTSE100 board as a non-executive, or only 5% of FTSE 100 directors;

2) Of these, just 20 sit on the remuneration committees of these other companies;

3) Where an executive from one company sits as a non-executive on another company's board, there are zero instances of an executive from that latter company also sitting on the first company's board.

Or to put it another way, there is no practical mechanism for executives of different companies to pay lavish amounts to each other by sitting on each other's boards, in the way that Mr Cameron seems to believe is rife.

Upward-only system

If there is a problem, it is probably the prevalent boardroom culture and the mindset of directors.

To put it another way, those who sit in the boardroom tend to have spent their working lives in a corporate environment dominated by the idea that the only way to attract and retain top executive talent is to pay the going global rate for the job, which has created an upward-only ratcheting system for corporate remuneration and has put boards in a bubble arguably too insulated from what's going on in the rest of the UK economy.

This perceived absence of diverse opinions in British boardrooms is why Mr Cable would like to see a presence and voice for employees on remuneration committees.

But would this cultural problem be addressed by the proposal to make shareholder votes on company's remuneration policies binding?

It is certainly the case that shareholders have taken executive pay more seriously since 2002, when it became mandatory for quoted companies to publish a separate directors' remuneration report and shareholders were given the right to vote on remuneration.

But it is not altogether obvious that turning this vote from an advisory one into one with compelling force would lead to another step change in shareholder engagement with executive pay.

The big uncomfortable fact is that many investors are, by dint of who they are, absentee landlords.

If they are hedge funds and other speculators that hold shares for months, or weeks or even fractions of a second, they could not give a fig about whether a chief executive is paid £4m a year or £5m a year.

Similarly, they may be overseas investors who simply don't have the time or interest to devote to what they would see as the parochial issue of boardroom pay.

So a minority of the investors in big British companies are investors likely to hold shares for the long term and with a significant incentive to ensure that executives are rewarded for doing the right things.

The biggest and hardest challenge is to turn the shareholders into responsible owners (as has been the case for as long as I can remember).

 
Robert Peston, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    +11

    Comment number 8.

    The problem is not just in the UK or in banks. Board and senior exec pay in large companies has become a function of greed. . The trouble is that there is no real pressure in the US on pay, and with ease of movement, it is the US that needs to take a serious lead. Many in the public sector take their lead from spurious comparisons with real businesses and need seriously reigning in also.

  • rate this
    +8

    Comment number 7.

    Clean Up All Professional Corruption and Weak Regulators

    Will the Big 4 Auditors assigned for Government Contracts stop charging ridiculous extortionate fees wasting Public Funds.

    Will Lawyers be tackled for charging ridiculous extortionate fees.

    Auditors and Lawyers Costs should be reviewed for overcharging and Bad / Poor Service and personally held liable for neglect of duty

  • rate this
    +2

    Comment number 6.

    Company A claims it has to pay high salaries to be competitive with company B. B claims it has to be competitive with A. So, if a shareholder revolt at A knocks back salaries and bonuses, it would wipe out this self-serving so called "justification" for B (+C......)

  • rate this
    +29

    Comment number 5.

    Of course not. What will happen in the real world is that the shareholders will be essentially bribed/blackmailed/threatened into maintaining the status quo.

  • rate this
    +14

    Comment number 4.

    Will the British tax payers have a say in the wage increases of MPs?
    Should any tax credit that is paid to low waged workers in the company come out of the top directors pay if it is over a certain limit?

  • rate this
    +60

    Comment number 3.

    Muvch as I understand the need for big companies to be competitive in ther global market for talent, this has got seriously out of hand, with executive pay divorced from results & from what is happening to everyone else's pay. These proposals will be inadequate. We need a law which forbids overall executive remuneration being more than, say, 20 times the pay of anyone else in the company

  • rate this
    +26

    Comment number 2.

    Discretionary Bonuses should not be given to Banks that make losses.

    If Banks (or Governments) cannot keep up their debt payments and/or make colossol losses Directors (and/or Country Leaders) should lose their Homes under Tort for damages and liabilities.

    Laws should be retrospective for 2008 crises starting from 2000

  • rate this
    +41

    Comment number 1.

    My pension provider is under-performing and is unlikely to exercise any influence for pay restraint in boardrooms of companies in which it invests pensioners' money - when it can't restrain excessive pay in its own boardroom.

    I've said many times that excessive pay & executive hubris can only be dealt with at constitutional level & then through major reform of company law + 'naming & shaming'.

 

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