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
    +1

    Comment number 48.

    Computer systems in pension funds & unit trusts continually arbitrage shareholding positions. If shareholders decide on boardroom pay, who will the shareholders be? Should they be entitled to decide today, when by tomorrow they will have sold out? And if they held the shares, would they really be interested?

  • rate this
    +1

    Comment number 47.

    I'm sure it will be a good thing for shareholder representatives to sit on remuneration committees. This will supply essential levelling down pressure.
    But employees and trade unions will want to be represented on these committees because they will not want downward pressure on wages from above, and will want to counteract the shareholder pressure.
    Perhaps stalemate will occur.

  • rate this
    +1

    Comment number 46.

    Presumably everyone working for a company is contributing to it in some way, or should be. Therefore their total pay for such labour, be they director, CE, clerk or cleaner should be proportionate to their contribution. So it should be possible to create standard proportions of the pot for each job role and thereby a ratio between the top rate and bottom rate which should be fixed. 1:10?

  • rate this
    +5

    Comment number 45.

    Cameron does NOT actually WANT TO DO anything about pay - just to pretend to be doing something.

    If he wanted to DO something he would implement something like my (and his!) idea of a NATIONAL MAXIMUM INCOME* enforced though the tax system. This would actually work unlike his present idea that will not! (as he intends that it will not!)

    His idea is a joke!

    *(set at 20 x National Minimum Wage)

  • rate this
    -15

    Comment number 44.

    The question of constraining executive pay must be a veritable 'nightmare' for politicians in our democracy which trades so widely with the rest of the world.
    In these difficult times economically speaking, any CEO who manages to keep his Company 'treading water', quite apart from being able to grow the business, is, in my opinion, well worthy of a significant increase in his bonus!

  • rate this
    +1

    Comment number 43.

    No.

  • rate this
    0

    Comment number 42.

    It's not just the top 100 companies but ALL of the 'big' companies (perhaps all listed companies?).

    So 'how many directors are directors of more than one company' would be a better question!

  • rate this
    +4

    Comment number 41.

    The people holding shares are no match for the various funds. These are corporate with very high salaries for their boards. Asking them to curb salaries is like turkeys voting for christmas.
    While the remuneration committees are made up of members of other boards, the you scratch my back and I'll scratch yours cannot change.

  • rate this
    +22

    Comment number 40.

    How can these people use the same argument - competitiveness - to justify ever increasing pay and bonus at the top AND ever decreasing pay at the bottom?

    You simply can't have it both ways.

    Or are we expected to believe these executive are increasingly more important than their workers?

  • rate this
    -1

    Comment number 39.

    @33. The_Maven "Are Andrew Marr and Jeremy Clarkson the state funded propagandist gifts that just keep giving to the Tories..."
    Hardly. Yes, Marr IS a state-funded propagandist, like most of the BBC. But unfortunately for us, the state they serve is the EU...

    As for Clarkson - I'm a striker he said to shoot, I saw what he said and in context it was fine and funny. A dig at BBC 'bias-as-balance'!

  • rate this
    +7

    Comment number 38.

    Another PR stunt I fear. The government can't even calm the salaries in the banks they saved from collapse how they going to convince everyone else to show restraint? Suppose the banks always get crucified so lets use another example. Royal Mail's chief Moya Green is being paid a massive bonus whilst RM loses money and is slowly falling to pieces. RM is owned by the government so sort that first!

  • rate this
    +2

    Comment number 37.

    Why cannot UK tax law include a salary to profit ratio, so that for executive salaries that exceed the ratio to the companies profit the excess is taxed at for example 90% ? .

  • Comment number 36.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this
    +8

    Comment number 35.

    Having lived near the top of a Fortune 300 company, I can say that exec pay is out of proportion to value delivered/risk or personal 'skin in the game'. Compensation committees are advised by consultants who generate comparability and market information, with a vested interest in an upward spiral. Negative business results never result in a negative compensation outcome, positive always do

  • rate this
    +4

    Comment number 34.

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

    and how many MPs are directors of one or more companies?

  • rate this
    +1

    Comment number 33.

    Are Andrew Marr and Jeremy Clarkson the state funded propagandist gifts that just keep giving to the Tories. JC is a rabble rousing ranter who wants striking nurses and teachers shot yet taxpayer funded bankers who hold the country to ransom he has no opinion on...mmm.
    Thankfully Robert you provide a little more balance than your BBC colleagues.

  • rate this
    +3

    Comment number 32.

    I wonder which spin master it was that came up with this headline grabbing non idea?

    Presumably they have a drawer full of them. To be brought out when it is deemed the time is right.
    What's next?

    Time for a little war before the Olympics perhaps?

    My money is on a health scare. That and a return of fox hunting.

  • rate this
    +1

    Comment number 31.

    What are the remuneration rates for similarly large companies in France, Germany etc?
    How many top people in those companies are British?

  • rate this
    +2

    Comment number 30.

    It is vitally important to clean up Corruption, Fraud, Extortion and Incompetence in all Businesses and Industries to ensure there is Integrity, Accountability, Transparency Legislation by all Government appointed bodies with real regulation by independent examiners

  • rate this
    +11

    Comment number 29.

    'Naming & Shaming' will not work - the Fat Cats have no shame.

    But nor will shareholders' voting - unless we multiply-up the effect quite a bit, to make them notice:

    Tax the *companies* 10x what they pay anyone over £150k.

    Even if they do nothing about it, at least UK coffers then get £9m instead of just £0.5m for each exec paid a million...

 

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