Facts must beat rhetoric in the earnings debate

EVER since the Prime Minister announced his intentions to “crack down” on City cronyism and rewards for failure, something’s become very clear – there are an awful lot of people talking an awful lot of rubbish about an awfully complicated subject.

This doesn’t mean we shouldn’t talk about it – but we need to bring the debate down to a more rational level and ditch the uninformed rhetoric.

A good starting point is to define the problem, look at the key facts and work our way forward from there. Sadly, no matter how well-intentioned the High Pay Commission or the Institute of Public Policy Research (IPPR) are, they will not resolve society’s ills by misleading the general public with half truths and frankly downright bad arithmetic.

First, the High Pay Commission and its 49 per cent pay increase. Very interesting until you realise that the figure is calculated by taking the average (mean) increase of only those chief executives that had a rise at all last year. It should also be pointed out that, excluding bonuses, 50 per cent of FTSE directors did not have any salary rise at all.

What about the IPPR and its claim that pay increased 33 per cent? Again, all very interesting until you find out that it’s based on a sample of a mere 85 companies spread over 14 FTSE sectors and the 33 per cent represents the (simple, unweighted) average of all those sectors’ average rises. Those economists among you, or even those with a humble O-level, will realise you are skating on very thin ice taking this approach. While it does eliminate some of the worst outliers, when you remember that not all the sectors are the same size and not all the companies in the sectors are the same size you are not applying a fair test. And surely fairness is at the heart of this debate?

There have been some truly egregious pay practices foisted on shareholders over the past 15 or so years and there are aspects of FTSE executive pay that certainly do need reform – binding clawbacks for failure being at the top of the list to ensure proper symmetry between shareholders and management would be a good start.

What has been really infuriating about the careless bandying around of bad statistics and political soundbites is the assumption that shareholders are spineless, brainless, careless or voiceless and need the government to lift them out of abject failure. The heavy lifting by the active governance community in the past 15 years has been astonishing. Where they have a voice they have used it and to great effect.

True, it seems a tad churlish to turn down offers of assistance, but David Cameron should give shareholders the help they want, not the help he thinks they should want.

The challenge at the heart of executive pay is performance – how to make it happen, for the long term and for the benefit of savers and pensioners – after all isn’t that what the City is here for?

Sarah Wilson is chief executive of Manifest, a proxy voting and corporate governance support service.