Bosses to wait longer for bumper payday

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For as long as I have been taking an (eccentric?) interest in these things (oh gawd, almost 30 years), there has been a neurotic, agonised and impossible-to-resolve debate about how best to align the interests of a public company's owners and its senior executives.

Let's ignore (as always) the ginormous elephant in this well-appointed room, to wit that those acting on behalf of the owners aren't really the owners but their agents (fund managers appointed by trustees representing savers), and simply point to an interesting trend highlighted in the Financial Times - namely that for so-called long-term incentive schemes, there is (probably irresistible) pressure for bosses to wait far longer to get their mitts on shares they've supposedly earned.

The FT says one of the world's biggest and most influential investors, Fidelity Worldwide, has written to 400 big companies in which it has stakes, warning that it wants them to increase from three to five years the length of time that must pass before shares from an incentive scheme vest.

To translate.

When Sir Richard Rich, of Rich Pickings Plc, is awarded an incentive scheme stipulating he will be given many millions of pounds of shares so long as Rich Pickings hits certain fashionable targets - normally some measure of how the company performs for the owners relative to its peer group - hitherto he would not be able to pocket any of those shares for three years after the date of award.

What Fidelity is saying is that Sir Richard, and the bosses of all other substantial listed businesses, should henceforth have to wait five years for the big pay day.

If these incentive schemes aren't elongated, Fidelity will be minded to vote against any company's pay policies at the annual meeting.

So can we expect fireworks and strife in the current round of negotiations on bosses' pay on this issue?

Apparently not.

I've spoken to the chairmen of a few of our biggest companies this morning, and they say that five years will in the coming months be the new norm for the length of these schemes.

Or to put this in simpler terms, the balance between shorter term incentives (what we typically call bonuses) and longer term ones is being shifted towards the longer term.

In other words, Fidelity is pushing at an open door.

So good thing or bad?

Well, as is my wont, I will state the spectacularly obvious: we all had a pretty harsh lesson in recent years about what can happen if chief executives have big incentives to push up profits in a reckless and unsustainable manner to earn cash bonuses (a big hello to all our banks).

So if managers believe that the big money is to be earned by running a business in a prudent way over the longer term, owners and the economy should feel the benefit.

Hip hip.

Or at least that is the theory.

But whether we do ultimately reap a societal benefit from forcing executives to wait for their wealth will all come down to the execution.

And the issue here is the nature and complexity of the targets to be hit, for the shares to be handed over.

Right now, these incentive schemes run to many pages of formulae and clauses, such that they are almost impossible to understand - which gives little confidence that they can be monitored effectively by shareholders.

A cynic would say this is to make it easier for executives to manipulate corporate performance for personal gain - and that there is an all-too-effective industry of remuneration consultants whose raison d'etre is to help executives game the remuneration principles set by owners.

Maybe that ain't so. But would it be so terrible to have remuneration agreements that someone who isn't a grandmaster in 3D chess might be able to grasp?

Is it really impossible, with a public company, to establish, as and when Sir Richard Rich retires to his arboretum in Wiltshire and chalet in St Moritz, whether he has left Rich Pickings in better or worse shape than when he arrived.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 165.

    One watches a programme about the industrial revolution and a shot come up showing a gigantic mill, surely built in, say, the late eighteenth century in some beautiful unspoiled bit of the countryside.

    The people who began the industrial revolution (setting us on relentless upward progress) didn't seek vast riches just, say, a year later. They played the long game

    Today? Gimme, gimme, gimme

  • rate this

    Comment number 164.

    I suspect it was because the government told them to as the workers were coming home and would outnumber the bored conservatives who are waiting to attend their conference.

    I am afraid like most HYS on the BBC it degenerated into a battle of prejudices.

  • rate this

    Comment number 163.

    So BBC, Why, WHY, WHY, have you closed the thread on Ed Millbands pledge to freeze fuel prices.

    Most people had hardly got home from work, let alone had THEIR say.

  • rate this

    Comment number 162.

    Dump the target culture as it drives the wrong behaviours. It also creates a me me culture

    Reward teamwork and achievement

  • rate this

    Comment number 161.

    On the perverse effects of modern ways of paying company bosses, it's worth reading Andrew Smithers' new book, "The Road to Recovery". It blames the dearth of investment by companies on incentives to maintain high profit margins and to overstate earnings per share. So share buybacks are preferred to investment that might hit earnings in the short term.

  • rate this

    Comment number 160.

    The most talented of innovative CEOs can achieve nothing without Mr, Mrs and Miss ordinary worker on shop floors or offices, workshops or telephones, checkout or counters.
    These workers've had their living standards squeezed, their disposable income (and consequently purchasing power) reduced, with some qualifying for State benefits because these CEOs don't pay them a living wage-can't afford it!

  • rate this

    Comment number 159.

    I worked for a company where initially all staff got the same bonus regardless of salary. Then changed to % of salary so those up the top got more. Then adding a performance related slant, influenced by how well you got on with your manager, well someone has to get low! Then they upped the max % for the top grades, more going to the top. Result - demoralised and cynical staff & happy managers.

  • rate this

    Comment number 158.

    The sooner the government realises that some people have too much money, the better. I think multi-millionaires who want more money have a severe case of OCD. It's daft that people are paid massive wages to do a job and, regardless of performance, they get a big bonus each year. Any bonuses should be divided by the number of employees in a firm.

  • rate this

    Comment number 157.

    Can we start a HYS campaign to have "money", a proven troll, blocked?

  • rate this

    Comment number 156.

    Wait longer for their bumper payday they may have to, but get their bumper payday regardless, they will, its just a matter of time.

  • rate this

    Comment number 155.

    'Money' must be wetting himself today, the perfect subject for his 'I earn a 6 figure salary' character. He got on first AND everyone's replying to him - dreamland for the little saddo. Maybe he's hoping to get a book out of his regular witless posts.

  • rate this

    Comment number 154.

    Tie executive pay and pension deals to more than just company performance! It should also be linked to employee/client satisfaction, and length of service (with some required minimum before ANY bonus or pension is payable).

  • rate this

    Comment number 153.

    @149. I respect your opinion, however idiocy is not confined to one sex.

  • rate this

    Comment number 152.

    Thrity plus years ago the unions had run out of control to blackmail the country. Today the leopard has simply changed its spots and runs business. Squash these bugs and put them on minimum wage because a large number of those earning that are perfectly capable of running a large business profitably and fairly. Shareholders and the managers they employ, managers are workers, have a duty to UK

  • rate this

    Comment number 151.

    The Germans have it right. Management by committee including workers and TU representatives. That way decisions get made for the good of all who work for the company. Don't take my word for it, look at the German economy and the products that come out of it. Some of the best engineering in the world delivered on time and for a fair wage.

  • rate this

    Comment number 150.

    The incompetence of BRITISH managers is legendary.
    NOBOBY and I mean NOBODY is worth more that £500,000 a year and bonuses should be a max of 10% of salary. If people are unhappy with their already grossly overpaid salaries go and work abroad and wreck somebody elses economy.

  • rate this

    Comment number 149.

    146. Kurt
    Kurt you are so right. As a woman I have seen the damage done by incompetent males whose only background is trying to prove who has the bigger male appendages. I have been employed by three organisations who have been all but ruined by men who will not listen to the advice of their managers & as a result have the only option but to shed jobs & make cuts.

  • rate this

    Comment number 148.

    The problem with annual bonuses is that managers will think in the short term. if these bonuses can only be claimed in the long-term then it will reduce reckless and mercenary behaviour.

    There should be a link between the highest and lowest salary and bonuses. So if a manager gets a £1.3 million bonus then the lowest paid staff should get £100k.

  • rate this

    Comment number 147.

    We also have Europe's lowest social mobility- another reason why the high paid aren't the top brains.
    We have to challenge our banker/bureaucrat class mentality.
    Competent professionals are demotivated by arrogant management, irrelevant paperwork, targets.
    eg. PISA said that's why our school standards are the fastest falling anywhere.

  • rate this

    Comment number 146.

    I have had some experience of these "captains of industry". Balloons, most of them. They don't have the best interests of the company at heart unless there's a few quid in it for them. Consequently they make horrendous decisions which cut costs in the short term, and leave carnage in their wake in the long term. Promote people who genuinely care about the firm, and who would act with integrity.


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