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 Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    +7

    Comment number 28.

    This question, sadly, doesn't really require analysis or discussion. The answer, concisely, is "nope".

    Any measures that might be put in place would be deliberately loose in the right places that will allow easy circumvention by those in the know.

    I don't consider this pessimestic. This is realism. I have honestly lost hope that any power struggle can succeed, long term.

  • rate this
    +16

    Comment number 27.

    Yes you are right that the part of the problem is the obsession with keeping the best talent. Part - in that A) its dubious if some of these people have any talent. Their companies are making losses and lack long term planning. Making real talent redundant whilst rewarding figureheads. B) the myth there is a shortage of talent for these positions

  • rate this
    +6

    Comment number 26.

    The top 8 non board bankers being named is not reform at all. It is a bit of red meat thrown to floating voters who are not in possession of the full facts.
    What about the 3000 bankers who pocketed over £1,000,000 in the last bonus round.
    I see labour have another 4 point lead but you wont hear anything in the media about it. mmm!

  • rate this
    +6

    Comment number 25.

    When Robert Peston says that the cultural problem is the general perception that you need to pay top dollar to attract the best managerial talent, he may be being too charitable. Perhaps the problem is that remunerations committees vote through excessive executive pay in the hope that one day, if that culture is perpetuated, an equally self-interested committee will do the same for them.

  • rate this
    +1

    Comment number 24.

    Does Cameron understand problem? Can Cable tackle it? Let's talk specifics: Facebook shares have been inflated. These valuations were pushed by those who INVESTED capital in Facebook so they can become billionaires. Main Street investors will be sucked into Facebook venture once the shares trade publicly. How do Cameron's solutions begin to tackle this sort of get-wealthy scheme?

  • rate this
    -3

    Comment number 23.

    Why should they?

  • rate this
    +3

    Comment number 22.

    Another poor piece by Peston. Where is the observation that there is little correlation between pay and performance at executive level. If execs bonuses were doubled would they perform better? Pay is more about bragging rights than performance.

  • rate this
    0

    Comment number 21.

    Robert

    The Manifest report referenced contains a fairly fundamental mathematical error! 52 FTSE 100 Executive directors are on the board (as a non-executive) of another FTSE 100 company. This is 52% of FTSE 100 Executive directors (52/100) not 5%. The 5% figure is only obtained because boards have multiple members.

  • rate this
    +39

    Comment number 20.

    I predict the following events:

    1) As soon as this is attempted, the first company it affects will go to court and claim it's illegal.

    2) The judge will agree.

    3) The whole idea will therefore be null and void.

    And when the above happens, the Government will say they are "disappointed" but will claim they have been thwarted by the courts, thus removing any responsibility from them.

  • rate this
    +12

    Comment number 19.

    Name & shame? Only if exec's who are rewarded for failure are forced to wear some kind of badge on their clothing 24/7...then again I doubt any of them mingle with the general populace very often. With widening wealth gap and seeming no link between success & rewards these people will continue to insulate themselves with their wealth in gated ghettos and foreign tax havens.

  • rate this
    +9

    Comment number 18.

    This proposal is probably a response to focus groups findings that the "we are all in it together" rubbish,is not being believed by key voting groups.Neocon Tory political philosophy should be against regulation so why bother with boardroom pay? Anyway the Lib Dems will claim it was their idea,for popularity,if it doesn't work (which it wont) they will get the blame-again! Brill wheeze Flashman

  • rate this
    +22

    Comment number 17.

    More smoke and mirrors from the government, as has been seen over the past years, they do a lot of talking but there is no intent to ever curb big business, they contribute far too much to our political parties for it to ever happen.

  • rate this
    +8

    Comment number 16.

    Yeah right.

    And if pigs run fast enough, then rotate at 70mph, they can become airbourne with a good headwind

  • rate this
    +5

    Comment number 15.

    The "Macho" attitude of hiring people "because they are expensive" should not be overlooked. Companies want to be seen as Fortnum and Mason types, not Netto shoppers.

  • rate this
    +32

    Comment number 14.

    Make tax returns public as they do in Norway - name and shame, that's the way to go if we're really serious about this.
    http://skattelister.no/skatt/

  • rate this
    +13

    Comment number 13.

    No way will shareholders crack down on executive pay, for it is in their vested interest not to do so. They want the best return at the end of the year so will do exactly as advised and told by the board and senior management. What irks me is that Cameron full well knows yet makes out he is a white knight.

  • rate this
    +1

    Comment number 12.

    Taxation is the answer.

  • rate this
    +15

    Comment number 11.

    How about linking MP's pay to the success (or otherwise) of the country?

    That would be fair.

  • rate this
    +11

    Comment number 10.

    White Collar Crime

    Law Courts have been abused by Lawyers making it impossible to get representation due to extortionate prohibitive costs

    Companies flout laws and will threaten and bully claimants by accruing legal costs for total inaction drawing out cases for years charging thousands each month for no work performed

  • rate this
    +13

    Comment number 9.

    This is one place where the EU could make a difference. An EU wide agreement on top pay control could not be ignored - Businesses shouldnt be allowed to do business in the EU if they dont comply. We have seen global businesses being brought to heal for eg anti competitive practices and fined by the EU. At the end of the day loss of profits is the only thing that these people understand

 

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