16th February 2012
Mindful Money asks – Is the outcry valid?
Let's take a look at the history of executive pay. According to The Motley Fool, chief executive pay has soared by more than an eye-watering 1,200% over the past 25 years.
Average pay among FTSE 100 CEOs has increased thirteen-fold from £300,000 in 1987, to £4 million today, after adjusting for inflation.
The government says that FTSE 100 CEO pay increased by an average 13.6% per year between 1999 and 2010, reports Reuters, compared with an average increase of 1.7 percent on the FTSE 100 index itself.
But for context, consider the debate that used to be…
Interesting, back in the 1990s, the reverse of today's debate took place. Chief executives were paid pittance in comparison to today, with bonuses few and far between.
The Motley Fool says: "In fact, many were saying that senior executives of large companies were not paid enough to reflect the impact they could have on a business, and that their pay should be more closely tied to performance."
But it seems we're now stuck in the system that was created as a result of this argument, with rocketing pay packets – despite the 90s being an entirely different scenario, with stellar stock markets and surging company profitability. The argument then was that it was, of course, fair for CEOs for blue chips to get a decent slice of the success.
The situation today – and the need to involve stakeholders
Stock markets have proved volatile for investors, while unemployment is on the rise and the economic landscape appears bleak. So what is the solution to set executive pay in line with the current situation?
Last month business secretary Vince Cable said that shareholders should be given a binding vote over how large British companies manage executive pay, and more companies should be able to claw back cash from highly-paid staff who fail to deliver.
Firms should also need 75% of shareholders to agree to any pay proposals, Cable told parliament, announcing measures to improve executive pay policy at Britain's biggest companies.
Sitting on a panel of experts to discuss new research commissioned by The Share Centre into UK corporate governance practice, Neville White, senior SRI analyst at Ecclesiastical and a Mindful Money blogger, said he was surprised by the muted response to the question – ‘Are non-executive directors effective and efficient in their role?'
The majority of survey respondents said this could only be evaluated on a case by case basis, with a not dissimilar number saying they simply cannot tell. "This suggests an obvious reality; shareholders cannot hope to understand and judge the inner workings of company boards, nor are they necessarily inclined to probe further," says Neville.
Involving investors – and clarification
Neville continues on his blog: "Our own view is that tri-partite action is needed to simplify reporting, quantify the expected face value cash number attached to any package, and to justify the amounts awarded.
"These three areas are currently wanting; bulky remuneration reports have not provided clarity, and moreover, have not allowed investors to understand the expected face value of annual remuneration packages at a glance. And seldom, do they justify the amounts paid except by quoting ‘the market'.
"As an investor, I want to understand why bonus opportunity needs to increase from 200% to 250% salary per annum, and how directors are better motivated by paying the additional opportunity; the same applies to why incentives are routinely paid, but never justified, for meeting only target performance.
"Nearly 95% of respondents to the survey agreed that executive pay has become excessive, with a designed propensity to be ratcheted ever upwards via a silent cabal of pay consultants, peer ranking and investor complacency; a good start in our view would be to focus clearly and objectively on these three principles: to simplify, quantify and, above all, justify the rationale for aggregate compensation."
Any anyway, are chief executives simply handy scapegoats
Neville's reaction is balanced. Yet given the media furore, you might think the financial crisis simply revolves around Sir Fred Goodwin's knighthood and Stephen Hester's bonus. But is this just a hunt for scapegoats in such an influential industry?
Certainly, the government should set an example. But can a contract such as Mr Hester's be rewritten when the terms and conditions were initially agreed upon? A cheaper but less competent chief executive is hardly the best way to safeguard taxpayers' money. Similarly, this raises the question – Is stripping Sir Fred of his knighthood really going to help us overcome economic woe?
It is not to say that bankers' pay isn't out of line with the situation we find ourselves in, but perhaps a more balanced, rational approach needs to be taken rather than extreme outrage.
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