In a previous editorial I recommended five reforms. My first was that there should be annual, binding shareholder votes on board pay; this is being adopted by the government. Companies will have to make offers contingent on shareholder approval, concentrating minds. My second proposal was that pay should be simplified, with a single figure used for total compensation. Again, it appears that this is being adopted. But the other three should also be considered.
Pay ought to be linked closely to shareholder value and should go down as well as up; fixed base pay ought to be kept to a minimum. This is something shareholders should insist on; there is no need for legislation. The fourth change required is that we need simple contracts that allow CEOs to be fired for breaching performance targets without a pay-off (which means changing the law on unfair dismissals). Fifth, remuneration committees ought to have to explain to shareholders once a year how they are getting value for money from executives – their incentive should be to reduce pay to save shareholders’ money. This would smash cronyism, whereby directors (exec or non-exec) believe that they all have an interest in pushing up wages, partly because they serve on multiple boards. Specialist remuneration directors may emerge; firms that want to signal they are serious about value-creation would appoint them to hold execs to account.
Rewards for failure must be rooted out, owners empowered and boards made to represent shareholder interests. But this should not be confused with waging war on genuine success. It is wrong to automatically equate high pay with excessive pay (something even Cameron too often does); without the context, one cannot know whether it represents a realistic market price or includes a sensible reward for exceptional performance, or whether it is too high a price to pay or a reward for failure. The current debate, infused by envy, is failing to make the right distinctions and is partly a cover for those who want to return to an egalitarian, high tax society of the kind we saw in the 1970s and which almost destroyed the economy.
A properly determined market wage is neither fair nor unfair: prices are determined by supply and demand, impersonal, amoral forces. In moral terms, it is wrong for bad CEOs who destroy firms – the likes of Fred Goodwin – to walk away with millions – they should get nothing – but it isn’t wrong for those who create huge value to be paid a lot by their willing owners. Roll on shareholder power.
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