Why didn't investors stop high executive pay?

Canary Wharf

There is something of a cross-party consensus that giving shareholders stronger powers to veto executive pay deals would help to curb the excesses of executive remuneration.

But in some ways this trust placed in the owners of businesses is a bit odd.

A decade ago shareholders were given far more information on executive remuneration deals, and the right to vote on executive pay policies, and it is only since then that the issue of executive pay has become the resonant symbol of perceived social and economic unfairness.

Admittedly it's really bankers' pay that has been most contentious - the notion that they scooped massive rewards in the boom years and transferred the losses to taxpayers and the wider economy after the 2008 crash.

And, as has been well and widely documented, shareholders did nothing to prevent bankers taking their reckless risks to boost profits and pay. In fact, there is a fair amount of evidence that they encouraged banks to lend and invest far more than was prudent relative to the capital that's supposed to absorb losses.

What's relevant is that investors, like executives, had something of a one way bet. If all went well, bonuses rose for execs and dividends rose for investors.

As and when it all went wrong, the worst that could happen to the bankers was they could lose their jobs. For the shareholder, the worst that could happen was that the share price could collapse to almost nothing.

To put it another way, for bankers and shareholders losses were capped or limited, but profits were in theory unlimited.

It was taxpayers who were exposed to the vast bulk of potential and actual losses: they (we) had to provide equity capital and credit to these vast financial institutions to keep them afloat, because the economic consequences of doing otherwise were unthinkable.

Now let's be absolutely clear about this: shareholders had the power to force banks to behave in a more prudent way.

There is no evidence that it would have made a fig of difference whether they had a formal veto power over pay deals - which is what the prime minister is now recommending as the centrepiece of executive pay reforms.

To repeat, shareholders have for years had the right to vote on listed companies' pay policies. The fact that these votes didn't formally bind boards was irrelevant.

The point is that many company directors have said to me then and since that if shareholders voted in large numbers against the so-called remuneration report, that was the kind of massive embarrassment that would bring about serious change.

And, except in very rare cases involving companies other than banks, shareholders almost never registered protests against executive remuneration in this way.

As I mentioned yesterday in my post (Will shareholders crack down on executive pay?), for most numbers of shareholders, the pay of executives is an almost irrelevant issue. If they're not planning to hold the relevant company's shares for more than a few months or even a few nano-seconds, why should they agonise over how much the boss of Megabank is likely to pocket in three years or five years?

There's also a more insidious factor, pointed out to me yesterday by a fund manager who looks after vast amounts of other people's wonga (it might be your wonga, if you're saving for a pension).

The point is that the earnings of people like him, who manage our savings, are even less transparent than those of company executives.

So his boss, he says, has a pretty big personal incentive not to make too big a fuss about how much and how corporate directors are paid, because someone might at some point start a campaign for greater disclosure of pay practices in the very highly remunerated fund management industry.

The consequence of this lack of reasoned open debate about pay may mean that everyone ends up losing.

Here are the terrifying statistics about one of the mad consequences of all this.

According to research by Manifest/MM&K and cited by the government, FTSE100 remuneration rose fourfold - from £1m to around £4m - over the past dozen years while the share prices of FTSE100 companies typically failed to rise at all.

Or to put it another way, if profits at FTSE100 companies increased in this period, all the rewards went to the managers rather than the owners - and of course the owners included millions of us saving for a pension.

I suppose this allocation of the spoils to senior directors would be less contentious if the rest of the population benefited through much higher pay too, even as their pension savings were squeezed.

But to quote from a Business Department discussion paper, "over the last 12 years employee earnings have grown 4.7% on average per year compared to 13.6% for FTSE100 chief executive officers".

Which means that employees in general saw their living standards rise, but at a rate that was two-thirds slower than those at the apex of corporate power.

And that gap between bosses and the rest has been widening, on most measures.

In these low-growth times, with the economy teetering on the brink of recession, official government data puts the increase in typical or median gross annual earnings at 1.4% to £26,200 (that's for the year to April 5 2011).

Gruel too for FTSE100 bosses?

Well, over the same period, the "average" pay of FTSE100 executives rose 49% to £2.7m according to Incomes Data Services.

Actually that's probably not the right comparison: the increase in so-called average bosses' pay probably gives too much weight to the more extreme pay settlements.

Better instead to use the rise in median or typical pay.

So that 1.4% rise in most people's earnings is probably more appropriately contrasted with a 14% rise to £2.6m in the median total remuneration received by FTSE100 chief executives, or a 12% rise to £3.8m in the remuneration package they were awarded, as measured by Manifest/MM&K.

To put it another way, bosses' pay rose around 10 times as fast as most other people's pay - and the ratio of their total remuneration to a typical person's earnings is at least 100 or as high as 150.

It may well be that the least worst system for running the economy involves those at the top earning more and more relative to the rest of the population.

But if the vast majority of people decide that at least some of the spoils going to company directors are unfair, then - rationally or not - they may decide they don't want this least-worst system any more.

Which is why many members of the government would argue that it's in the bosses' selfish personal interest to conspicuously show more pay restraint, so as not to kill the goose that has been laying those enormous golden eggs for them.

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

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  • rate this

    Comment number 1.


    By investors who do you actually mean Is suggest that the overpaid clerks of pension funds whose bosses set the high pay agenda themselves are the actual investors. So why on earth would one expect these investors to vote pay down?

    The ONLY solution is to use the TAX SYSTEM to cap pay.

  • rate this

    Comment number 2.

    Investors are not organised to impact executive pay, pension/investment funds don't ask their clients on how to vote and are part of the problem.

    Another half thought out scheme from the Tories with no actual impact.

    I'm not against pay differential, but at a sensible level, but with those who get high pay sharing the risk.

    The tax system should work better and collect more.

  • rate this

    Comment number 3.

    Executive remuneration is a structural issue which the UK govt has only the desire to address on a superficial level.

    There are ways forward and perhaps it may be worthwhile taking a look at the CFA UK response to UK Govt on this issue

    Executive remuneration

  • rate this

    Comment number 4.

    "Why didn't investors stop high executive pay?"

    ....because some humans will keep their mouths shut about the most abhorrent actions of others as long as they get rewarded

    All acts of fascism are supported by such inaction and low morality

    They are always supported by a cast of politicians
    which Vanessa Redgrave revealed, she believes (as I do) that politicians are either scoundrels or idiots.

  • rate this

    Comment number 5.

    Time has come for MPs to raid the 'Fat Cats' as they should pay more tax to fund a better political structure. By increasing MPs salaries, and contributing some of it to a EU-wide MEP's bonus scheme, we would then of course get a commensurate increase in the UKs political governance.

  • rate this

    Comment number 6.

    The last thing we want is more transparency. This just allows executives to gather evidence as to why they are miserably underpaid. They aren't of course but you can always find someone paid more and make your case.

  • rate this

    Comment number 7.

    Very worrying trends indeed, not least because of the short-term-ism in the system. I agree with the article that shareholders will fail to moderate executive pay and the excessive and disconnected bonus culture. Perhaps we could say that politicians' pay has been moderated by the voters and free press, could not plc executives' pay be moderated by employee and customer representatives' votes?

  • rate this

    Comment number 8.

    John from Hendon is right.

    If the general public are (rightly) worried about the cosy relationship between media and the MET - they would be appalled at the cosy relationship between FTSE 100 board members and pension / hedge fund managers - who are ALWAYS the biggest (proxy) shareholders.

    Ignorance will be bliss - until they retire when it will be too late.

  • rate this

    Comment number 9.

    The average 'investor' is a powerless member of a pension scheme who's interests are supposed to be protected by a pension fund manager who's greed & membership of the 1% club ensure failure.

    In J. K Galbraith's The Great Crash he posits that the number 1 cause of the Great Depression was disproportionate income increase of the top 5% during the 20's.

    Tax the hogs.

  • rate this

    Comment number 10.

    In many cases remuneration is based on earnings per share and share prices, these are flawed metrics as they do not reflect the value being generated or destroyed. A publicly listed company like any business, generates value when it meets or exceeds its cost of capital.

    Why focus on the 10k publicly listed companies; there are 4mln+ businesses in the UK

  • rate this

    Comment number 11.

    Nobody asks questions about risky trading/business ventures/whatever as long as money is being made. Only when they started seeing losses did it become a concern and thought to be questioned! http://tinyurl.com/6yl4xgb
    A different tax system does appear to be the only way to combat it, as then whether doing well or not at least it will be a fairer system!

  • rate this

    Comment number 12.

    Most of the 'investors' or those making the largest investments or having the largest say on investments are those making investment decisions for major banks & pension funds - & who are themselves liekly to be serial recipients of excessive high pay. Proposal for investors to restrain high pay is seriously flawed & unworkable as is a need to start in the right place & tackle this constitutionally

  • rate this

    Comment number 13.

    Robert; how can u argue that shareholders risk is limited when their share values can drop to almost nothing? In reality, shareholders usually have no say because their holdings are in nominee accounts. The real culprits are greedy bosses; a system where ALL employees have the same profit sharing sysem is long overdue

  • rate this

    Comment number 14.

    The private pension system has been in need of reform for a while: it's not a competitive market. How can there be any competition when it's nearly impossible for customers to leave underperforming fund providers?

    Worse, they are a huge block of capital in the Market so the absense of pressure on pension fund managers to perform destroys pressure for long term corporate performance in the Market

  • rate this

    Comment number 15.

    Why would it be the least worse system to have those at the top earning more and more? Aint you never heard of velocity of money and how it declines with excessive wealth concentration and how low velocity of money leads to economic slowdown or contraction ?

  • rate this

    Comment number 16.

    One of the reasons why shareholders seldom take a stand on executive pay is because of the proliferation of nominee holdings, where the ultimate holder looses the right to vote. The only way to stop this theft and corruption amongst remuneration comittees is to legislate to make big changes to the composition of these committees, on a similar basis as used in Germany.......

  • rate this

    Comment number 17.

    I'd like to know how Simon Jack got away with suggesting that CEO fraud is a 'victimless crime' if the company is privately owned this morning on Radio 4

    Lets ask the BBC how they 'allowed' their executives to become overpaid.

    It seems the greedy are now criticising the greedy for being greedy

    Will txpayers ever relise their mammoth tax bill in 2018 will have been caused by these acts in 2011?

  • rate this

    Comment number 18.

    Link executive pay to actual CHANGE in a company's EBITDA.
    Exec pay is now a one way ratchet but actual business results
    and share prices go up & DOWN. Hence pay should also go up and DOWN.
    Why not STANDARDISE A EBITDA BASED PAY METHODOLOGY NATIONALLY for all exec pay - i.e enforce a std performance metric that is a true measure of the CHANGE in a company's value. Level the playing field.

  • rate this

    Comment number 19.

    Why investors do not stop excutive pay?

    because they're not reporting to a group of knights in shining armour sitting around a round table & also because they're 'scum'?

    This is a constitutional problem or rather the lack of it - only an effective new UK constitution will enable the rich & powerful to be held to account for their mind-set, philosoply, character & ethos - v national interest

  • rate this

    Comment number 20.

    Perhaps we need to re-examine the concept of limited liability? Or make directors of banks personally liable so that they too can lose everything!


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