Lavish reward but where’s the risk?

Tuesday, 22 November 2011

We were pleased to read in today’s Financial Times about the findings of the High Pay Commission after its year-long enquiry into executive pay. Increasingly lavish and complicated remuneration packages are described by the Commission as “corrosive” to the well-being of companies and the economy. We wholeheartedly agree.

A report published by Incomes Data Services last month said that total earnings of FTSE 100 directors rose by an average of 49% year-on-year at a time when overall wages throughout the UK economy were falling in real terms. Barclays banker John Varley was reported to have earned £4.36m last year, 169 times the wage of the average British worker. In 1980, the ratio was 13 times.

Quoting the High Pay Commission’s report, the FT says;

“In 1979 the top 0.1% of earners took home 1.3% of national income, but by 2007 this had grown to 6.5%. At the current rate of increase the top 0.1% would take home 14% of income by 2035 – equivalent to that seen in Victorian Britain...Average pay of all FTSE 350 directors rose by 108% between 2000 and 2010, while earnings per share rose by 73% and year-end share prices fell by 5%.”

As is the case in Premier League football, the world of executive pay (mainly, but not exclusively, amongst FTSE 100 boards) seems to be gripped by a collective madness in which everybody is paid too much, even those doing a pretty average job. We only have to look at the recent share price performance of companies like HMV and Thomas Cook, amongst numerous others, to realise that that directors expect to share in the rewards when a company does well but leave shareholders to take the pain alone when a share price collapses. Shareholders, who are actually risking their wealth, deserve better. Risk and reward are no longer in balance and once a director is in The Overpaid Club, he (it’s usually a “he”) never leaves. Even if he does a poor job, he can expect a very generous pay off and is soon in another well-remunerated role. We cannot agree with the old argument that “we have to pay them this much, otherwise they’ll leave”; has anyone ever tested this theory?

We would like to see institutional investors and other shareholders do more to address this problem and, although we never like to advocate more regulation or legislation, perhaps the government could show some initiative here. Sensible companies should be taking action on this issue in case the government decides to get involved. But we’re not holding our breath.