Bosses’ pay: the long and short of it

Allister Heath
THERE have been far too many cases of rewards for failure in corporate Britain in recent years. It must become easier and cheaper to sack bosses who fail to deliver. There are tentative signs, however, that shareholders and boards are becoming better at controlling CEOs. It is also vital that successful bosses should be rewarded well, proportionately to the value they create. That, at least, was the argument I attempted to make on BBC1’s excellent Sunday Morning Live yesterday.

Bosses of UK firms can be dislodged at a much lower cost than their US rivals – in fact, up to 50 times less. BP’s Tony Hayward’s pay-off of one year’s salary was hardly excessive for someone of his seniority; what angered some was the value of his pension. Yet most of this was accrued before he became CEO. Not all golden parachutes are bad: CEOs should be willing to sell their firm and write themselves out of a job in the event of a great bid.

It is hard to run large, quasi-bureaucratic multinationals. Successful bosses need to hire and motivate a group of individuals who are as good as them and want the top job; they need to be great communicators, visionaries, anticipate radical change and be willing to take tough, ruthless decisions on personnel and costs. They need product, operations, market, financial, economic and geopolitical knowledge, as well as managerial skills. Most people can’t do it.

Running a major organisation also entails huge responsibilities: planes crash, trains go off the rails, financial crises engulf even sound banks, cars have faults, food gets contaminated, news organisations make errors and, of course, oil sometimes spills. Sometimes, CEOs are directly to blame because they have presided over an out-of-control, dangerous culture; but more often than not there is little they could genuinely have done to avoid many of these incidents. Accidents and errors are part of the human condition; risk can’t be entirely eliminated. It is right that taking on such responsibility be rewarded – in return, a CEO needs to be willing to go to the other side of the world to comfort victims, to face politicians and, in extremis, to resign.

Few people ever get the opportunity to run a large firm; but it is in the system’s interest to motivate all of those who think they may have a chance. If you only have one chance out of 10,000 of making it to the top, the prize needs to be worthwhile. There is, of course, a limit to this. Compensation for top people has often gone too far, egged on by “consultants” and a common interest among City figures to inflate wages. Firms who should be paying their CEO £500,000 are paying £1m, with no effect on quality. Shareholders have become more willing to vote down unrealistic awards; they need to go further. There should be a binding vote at AGMs on CEOs’ pay.

The whole point of limited liability companies is that those who run and finance them cannot lose more than their investment and their job. It is only if they commit fraud or gross negligence that they can be prosecuted or fined. If CEOs lost all of their wealth when things went wrong, either nobody would want the job or else everybody would be excessively careful. The result would be managed decline: a slowly shrinking economy, with falling employment and declining incomes. When it comes to the debate over CEO pay, like with so much else, we are in desperate need of more reason and less emotion.