29th May 2013
Whatever happened to all those shareholder revolts over executive pay asks financial journalist Tony Levene. Last year, and the year before, grumbles leading to investor complaints and adverse votes were ubiquitous. But the 2013 high season for annual general meetings – usually the theatre of choice for anti-fat cat moves – has seen relative peace break out.
Why? One obvious reason is the strong performance of the equity market over the past six months. Despite the recent setbacks, most shareholders are happier than they were this time last year. And contented investors leave what they consider well alone.
A second is the European Parliament seems finally – after years of arguments – to have arrrived at an arrangement to ban bonuses that are more than bankers’ fixed pay. Whilst everyone expects loopholes, fixed pay is easier to monitor than complex bonus structures. It may not work perfectly but it is a signal that banks are to oil the wheels of the economy, not to grease the palms of top bank employees. And what applies in the most well publicised sector should have a knock-on elsewhere.
A third is media fatigue with the story. The less pay is reported, then the less shareholders become agitated.
But the issue has not gone away. In an academic paper planned for autumn 2013 publication, Philippe Jacquart, a professor at a French business school, and US based marketing professor Scott Armstrong, will go further than other work on this subject which points to high pay having no relationship with out-performance. Instead, they will claim high pay is actually harmful to companies and to productivity in general.
They will question why board level pay should be so much higher now in relation to average earnings than one, two, three or four decades ago while outcomes are no different, and the how and why of remuneration committees agreeing to ever increasing packages when executives jump ship every few years rather than sticking with the job for its own fulfilment as they used to.
But more importantly, they intend to stretch the debate with a look at how and when high pay is actually detrimental. Their line is that top executives are too busy focusing on their own financial incentives rather than the future health of the company. Most remuneration packages are based on set parameters, often established during a different financial cycle. When that alters, executives should be flexible enough to move to the new reality. But the need for change can mean fresh thinking and direction which is not compatible with the present bonus deal.
Additionally, high pay plays badly with other employees – and huge packages have to come from somewhere. All too often, the easiest pool to raid is what would have been allocated to dividends.
So in the short term – by which most pay deals are measured – nothing moves, leaving the company more exposed to change. And by the time the market realises this, the executive has found a replacement job, probably collecting a golden parachute on exit and an equally valuable sign-up fee at the new firm. It provides all the salary action of a premier league footballer – but without fear of injury or ageing.