Rights and wrongs of boardroom pay

Allister Heath
IT’S simple, really. Good bosses who improve their company and grow returns to shareholders should be rewarded and see their pay go up; bad bosses who destroy shareholder value should see their pay cut or be fired without a big payoff. That should be the culture in the City. The only exception to this rule should be superhuman performances by bosses facing a disastrous environment: a boss who ensures that their firm loses just 5 per cent of its profits in a year when its competitors are going bust and the world is plunged into recession deserves to be rewarded.

The debate ought to be how best to empower shareholders to ensure that their agents (top bosses) deliver the goods for them, rather than feathering their own nests. The private equity industry does this much better than listed Plcs. Unfortunately, the debate has been hijacked by those who hate all high earners and all wage inequality and who in their hearts of hearts want the government to impose 1970s-style, command and control caps on wages. In many cases, we are seeing members of the top 1 per cent of highest earners waging war against the top 0.1 per cent. It’s all rather unedifying.

Some of the proposals from the High Pay Commission are sensible, including the call for a radical simplification of compensation packages and for firms to reveal the total pay figure earned by the executive. Most of its other ideas are flawed, however. Publishing ratios between the top and bottom earners is merely a way of damaging industrial relations and fuelling envy . Establishing a quango to monitor high pay is equally misguided, as is the idea that employees should be put on remuneration committees. Workers and the government don’t own companies so should have no say in what CEOs are paid. It’s a question of property rights (but it would be fun to put a couple of 28-year old employees of an investment bank on a remuneration committee; I doubt the Commission would get the results it desires). The report highlights anger at the fact that those at the top continue to reap rewards, while the wages of many workers are being cut in real terms. Yet in reality these two issues are unrelated: the poor are not losing their jobs because the rich are getting richer. It would make more sense to improve the state of the economy and reduce inflation to make sure everybody’s incomes are rising, rather than bashing the few who are still doing well (often because they work for firms with global operations exposed to buoyant economies).

I recommend five simple reforms. First, there would be annual, binding shareholder votes on board pay. Second, pay would be radically simplified, with a single figure used for total compensation. Third, pay would be linked very closely to shareholder value and would go down as well as up; fixed base pay would be kept to a minimum. Fourth, we need simple contracts that allow CEOs to be fired for breaching performance targets without a pay-off. Fifth, remuneration committees should have to explain to shareholders once a year how they are getting value for money from executives – their incentive should be to try and reduce pay to save shareholders’ money, not the other way around. Rewards for failure must be rooted out, owners of companies empowered and boards made to represent shareholder interests. It’s radical stuff – but not to be confused with waging war on genuine success.

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