As research suggests high exec pay damages company performance where are this year’s shareholder revolts?

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.

9 thoughts on “As research suggests high exec pay damages company performance where are this year’s shareholder revolts?”

  1. just a thought says:

    Hi Shaun,

    I am pleased to report that France has a plan… it’s called “France 2025”, in the meantime as “Forbin” will say…Sit, relax, enjoy the show and enjoy some well deserve Pop Corn…

    1. Anonymous says:

      Hi Just a thought

      Actually if one looks at longer term issues then France was supposed to come into favour. In essence it has better demographics or perhaps I should say less worse ones than much of Europe. At a time like this it is hard not to think of the JM Keynes quote “In the long run we are all dead”.

  2. dutch says:

    In terms of the employment figures are we measuring like with like?

    Do the Germans and French use the same measures?

    1. dutch says:

      Worth noting that despite a fine NFP print of 288k,participation rates remain subdued.
      I’d be fascinated to know the make up in terms of French part timers/full timers.

    2. Anonymous says:

      Hi Dutch

      Eurostat does apply consistent methodology overall as it explains here.

      “Eurostat produces harmonised unemployment rates for individual EU Member States, the euro area and the EU. These unemployment rates are based on the definition recommended by the International Labour Organisation (ILO). The measurement is based on a harmonised source, the European Union Labour Force Survey (LFS).”

      On this basis France is at 10.1% and Germany at 5.1%

  3. Anonymous says:

    Great column, Shaun. It seems that France’s inflation data also indicate a weak economy. The HICP for April shows a 0.8% inflation rate, not so bad,- the same as Germany’s, but the provisional estimates for the indexes for prices of second-hand dwellings showed a 1.4% four-quarter decline for 2014Q1 for all dwellings, including flats, and a 1.7% decline for houses only. So if the French HICP were adjusted to include owner-occupied housing, it would show a very low inflation rate indeed, to the point where a shock could easily push it into deflation territory. Andrew Baldwin

    1. Anonymous says:

      Hi Andrew and thank you.

      There is evidence of disinflationary pressure in some areas of the French economy. For example agriculture.

      “In May, overall agricultural producer prices dropped by 1.8 % compared to April ; over one year they fell by 5.2 %”

      Also producer prices

      “FRENCH MARKET: –0.5 % in May

      In May, French producer prices in industry for French market dropped for the third straight month in a row (–0.5 % after –0.2 % in April and –0.3 % in March).”

      At this point though French consumers will no doubt be welcoming such price falls. Also as ever the picture can be complex as those who enjoy a tipple will be noticing.

      “Overall prices of wines increased by 14.3 % over one year (and by 23.1 % for PDO wines), further to the drop in crops for the last two years.”

  4. Anonymous says:

    But it was the French who insisted that the Germans join the Euro as a price for permitting re-unification. (from Der Spiegel article)

    Be careful what you wish for, you might get it

  5. Anonymous says:

    Hi Forbin

    The weather helped with the sunburn issue by being rather wet over the weekend unfortunately. As to the Euro as we have discussed on here before it would work much better if the Germans left it. Was that something of a fatal error by the French?

    Whilst I was away I note that corn futures have dropped again to US $4.17 . Even the Co-op is selling a bag of toffee popcorn for a £1 now. So you might get some cheaper popcorn although other basic food prices are still up considerably in 2014.

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