Shareholders are accountable for executives’ pay

Stuart Fraser
BONUS season is always a potentially politically explosive time and this year is unlikely to prove any different.

Total bonus payouts across the City are expected to fall steeply this year from £6.7bn in 2010/11 to £4.2bn (roughly a third of the £11.6bn peak before the crisis) but – understandably – this will not prevent public anger as the UK and the world faces an incredibly challenging economic environment.

We need to remember, however, that executive pay is not just a City issue but one for all sectors of the economy.

David Cameron has recognised this by outlining plans to give new powers to shareholders of all companies that would enable them to veto “excessive” boardroom pay at Britain’s top businesses.

Of course, shareholders (namely the government in the case of banks it owns or has bailed out) already have considerable powers in this area, but we need to encourage them to engage in the scrutiny of this process more actively.

The government’s proposal conforms to the basic principle – which I strongly believe in – that the owners of businesses should be entirely responsible for determining pay awards to managers and other staff they employ.

This also extends to bonuses. It is shareholders that should ensure these payments are structured according to results and used to incentivise staff appropriately.

In a global marketplace, UK-based firms need to pay a competitive rate in order to retain internationally mobile staff – or equally crucially attract new, talented individuals.

The UK cannot afford to drive skilled talent away by giving the impression we do not welcome high earners. High pay for success is perfectly acceptable, it is high pay for failure that needs to be addressed.

It should be remembered that 50 per cent of any bonuses or salary over £150,000 goes back to the exchequer to support areas such as social services, education and health.

Calls for greater transparency and simplification of compensation packages are understandable but will be difficult to implement. Companies use a wide range of different benchmarks, depending on the objectives they wish to achieve. Companies are not homogenous and compensation packages need to be bespoke.

But we should be wary of unintended consequences when it comes to legislating in the area of pay. We have seen banks shed tens of thousands of jobs in recent months, partly due to the shift away from flexible bonuses to higher fixed salary costs that was encouraged following the financial crisis. The Eurozone crisis, costs of ringfencing banking activities and higher capital requirements are placing additional pressures on jobs in the City.

I have no doubt that the processes that determine executive pay across all sectors could be improved – and shareholders are the people to do just that.

Stuart Fraser is policy chairman at the City of London Corporation.