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

Is Osborne right that a smaller state means a richer UK?

George Osborne has firmly established the size of the state, and government benefits, as the central battleground for the general election.

Read full article

More on This Story

Comments

This entry is now closed for comments

Jump to comments pagination
 
  • rate this
    0

    Comment number 328.

    I do agree that executive pay has got out of hand but I don't think a company board would agree to pay £X for Mr. Y if they thought Mr. Z could do the job for a fraction of the price.

    When Mr. Obama was jumping on BP, Goldman and bankers bonuses a friend pointed out that the best baseball players get big wages but that was OK and necessary for the team.

  • rate this
    0

    Comment number 327.

    Whilst you have remuneration panels in the present form, friends and
    relatives will make sure they give satisfaction to friends and
    relatives. Make sure there is no alllegiance within the Remuneration
    Committees.
    Edward Wilcock (84)

  • rate this
    0

    Comment number 326.

    As it is a rich man's world, it will be the shareholders voting each other's pay awards, unworkable!

  • rate this
    +1

    Comment number 325.

    I agree with #12. Taxation is the answer. Make rates steeply progressive over £1m., so that virtually nothing would be gained by paying oneself anything over that figure. If some greedy b******s left the country, so much the better.
    AkaAlanG

  • rate this
    +1

    Comment number 324.

    Look at the Gini Index, a widely accepted statistical measurement of income inequality - the UK has the WORST in Western Europe (including the EU as a whole!) From the end of WWII to around 1980, we had the LOWEST income inequality, but then inequality worsened rapidly in line with Thatcherism and its 'survival of the fittest' philosophy. Not so much Great Britain now, more like GROSS BRITAIN!

  • rate this
    +3

    Comment number 323.

    These proposals are unlikely to make a significant difference. Generally, the shareholders who have the most votes are also the super-rich and are stuck in the same foolish mindset that you need to pay £millions for good leaders.

  • rate this
    +1

    Comment number 322.

    I do not dispute the sincerity of David Cameron Bat will required lot more of the shareholder to bring back same sanity and understanding of the real world in the think of the corporations.
    What is required is a new type of capitalism with stringent rule and regulation.

  • rate this
    0

    Comment number 321.

    #318 Justin150 its the relativistic approach that is the problem. They are rewarded on the basis of their share of the industry but with absolute rewards, regardless of how rapidly diminishing that industry might be or how damaging to the overall economy it might be.

    Investment banking is a case in point where they are rewarded on the basis of how much of the QE injection they can grab,

  • rate this
    +2

    Comment number 320.

    How about a new organisation serving shareholders? Make it possible for all shareholders to assign voting rights of all shares they have to this organisation whose job is to represent their voting power on all boards. Reducing such power from the city funds. So even funds if their fund holders sign up (compulsory to ask) have to shift that % of voting in all holdings to this new org.

  • rate this
    +1

    Comment number 319.

    These top overpay taking execs, should remember random promotion does better than selection. They have no special 'talent'. We could sack the lot at the top and give the place to their number twos at half the pay and there would be no change in performance. If they were any good they would have started their own companies with their own ideas and personal cash. We know why they do not!

  • rate this
    0

    Comment number 318.

    #309 what you say about some salesmen in some industries is true but where the product is very specialist it is certainly not true. Professional services firms often have consultants who do some work but are mostly sales driven, you could not replace them with the unemployed as they would not have the qualifications necessary

  • rate this
    0

    Comment number 317.

    It would be interesting to know what method of determining directors' and executives' remuneration is used in Germany -- a somewhat more successful economy to our own.

  • rate this
    0

    Comment number 316.

    Why are we so concerned about pay at the top The top pay in the public sector yes We should be more concerned about pay at the bottom They are the people that will keep the wheels of industry working by spending what they earn

  • rate this
    0

    Comment number 315.

    rik, you just don't get it do you? by curbing their potential, and forcing them to go elsewhere, we are solving the problem. the people you would 'retain' are clearly rubbish at their jobs, so forcing them to go elsewhere gives us an opportunity to replace them with competent bods. as i said earlier, there is no 'talent' at this level at the moment, only incompetence, greed and corruption.

  • rate this
    0

    Comment number 314.

    I very much doubt whether Margaret Thatcher would have thought executive pay too low! She hated cronyism of all sorts and believed fervently in competitition.

    What we have here is a closed shop. The only way round it is for DEFAULT provisions to be set in company law. Shareholders could then override these if they got their act together. In the meantime pensioners are being shafted.

  • rate this
    +2

    Comment number 313.

    I cannot see this coalition of the right taking any meaningful action on this issue.
    They may acknowledge public disquiet at the growing disparity between senior management and employee pay but philosophically they see nothing wrong with it.

  • rate this
    +1

    Comment number 312.

    i would sooner have 20 'average' people doing an average job, than 1 'talented' person that is overpaid, and does their job very poorly, if at all. grave yards are full of indispensable, talented people. sack this current crop of useless oiks and a new lot will fill their space quicker than you can blink.

  • rate this
    0

    Comment number 311.

    Another case of the wealthy bears not ___tting in the forest.

  • rate this
    -1

    Comment number 310.

    #284 I know several people on 20% commission - they get no base salary though and it is not easy.

    #301 So if the salesman has been consistently generating £2.5m a year you are happy for a company to lose £1.4m in revenue and sack 4-7 workers

  • rate this
    +2

    Comment number 309.

    253.Justin150

    Your salesman example shows that you haven't ever run a sales-force!

    Salesmen sell something and that something is what people buy. The job of salesman is grossly overrated... by salesmen! Providing they make the calls, are not rude to, and listen to, the customers and have some passing acquaintance with the product then they can sell.

    If you had chosen brain surgeon then ...

 

Page 1 of 17

 

Features

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.