Once again, shareholders are up in arms about the soaring pay of underperforming bosses. Might they force change this time? Simon Wilson reports.
What has happened?
The spring Annual General Meeting season is upon us – and the sound of disgruntled shareholders is echoing across the land. The FTSE 100 remains well off its all-time high. The global economy is stuck in second gear. Growth in workers’ wages is only just nudging into positive territory (after inflation). Yet the pay packages of top executives have never been in ruder health.
Why, shareholders want to know, should BP boss Bob Dudley get a £13.8m pay package (a rise of 20%) in a year when the oil giant clocked up record losses, cut thousands of jobs and froze staff pay? Why does Anglo American boss, Mark Cutifani, deserve a package of £3.4m for overseeing a 75% share price collapse last year?
Haven’t we been here before?
Yes. In 2010, the then-boss of the Confederation of British Industry (CBI), Richard Lambert, warned that excessive pay was a key obstacle to restoring trust in business after the financial crisis, and that top pay had become so excessive that CEOs “risked being treated as aliens”. In 2012, a cluster of AGM pay rebellions was dubbed the “shareholder spring”, though its impact was negligible. This time though – according to some – the issue really is coming to a head. This month, 60% of BP shareholders rejected Dudley’s pay package (in an “advisory” non-binding vote).
Hours later, more than 50% of Smith & Nephew shareholders voted against a package that included bonus payouts for targets that hadn’t been met. More rebellions are expected in coming days – with names such as Shire, Burberry, Reckitt Benckiser and WPP all in the frame.
Who’s worried about executive pay?
Everyone from the CBI to the City’s biggest fund managers. Simon Walker, director-general of the notably unrebellious Institute of Directors, warned that businesses must now address shareholders’ anger, or it “will only be a matter of time before the government introduces tougher regulations on executive pay”. The investment arm of Legal & General – which voted against both the BP and Anglo American packages – says that pay ratios (the multiple by which a CEO’s pay outstrips that of the average worker) are the “hot topic” of 2016.
A report by the Investment Association, the UK asset-management industry body, recently condemned executive pay as “not fit for purpose” – inflated rewards had “resulted in widespread scepticism and loss of public confidence” in listed firms.
Why is pay so high?
In 2014, the average pay of FTSE 100 CEOs was £4.96m – 148 times the average employee’s wage. What’s got people so riled – and worried – is that this pay ratio has surged over the past two decades, without being justified by shareholder returns. One reason for high pay is convergence between pay in the US and Europe. The gap has narrowed, reckons the Financial Times, as “a cadre of global managers emerged with similarly high expectations”.
There is also a school of thought that too much information can be counter-productive, if it leads to a spiral of ever-higher benchmarks. Nigel Wilson, CEO of Legal & General, who chaired the Investment Association review, says that “use of median comparators has driven disproportionate rises in executive remuneration”.
Don’t they deserve the money?
The argument that firms benefit from paying mega salaries to retain “talented” leaders is superficially attractive, but only superficially. First, large companies are incredibly complex organisations. It is all but impossible to disentangle and measure the contribution of the figurehead, adjusting for factors such as market conditions, the decision of predecessors, or lucky timing. Is a CEO paid £15m claiming they would do a worse job if they were paid £5m? Presumably not.
Second, very high pay for a few risks demotivating other staff and damaging overall performance. Finally, most fundamentally, ultra-high pay damages equality of opportunity and social cohesion, and thus undermines capitalism by bringing it into disrepute.
What is to be done?
No one solution will bring salaries back to earth, says Andrew Hill in the FT. “Here are four that, in combination, just might.” First, reduce complexity. Reward systems are so complicated – basic salaries, short-term bonuses and “long-term incentive plans” – that they readily breed suspicions that CEOs are gaming the system. Simplicity will encourage restraint. Second, “make transparency work in favour of restraint”.
Bench-marking can trigger an upward spiral where everyone wants to be paid above average; published pay ratios offset that. Third, link CEO pay more closely to actual performance: what triggers rebellions is the perception that CEOs hit the jackpot, whatever happens. Fourth, reinforce remuneration committees, and encourage them to use common sense and discretion. Easier said than done; but without it, businesses can expect harsh regulations from policymakers, and not just pressure from shareholders.
The maze of remuneration
Creating pay structures that perfectly reflect performance is “a mug’s game”, says the Schumpeter column in The Economist. “That hasn’t stopped an entire industry of consultants and proxy advisers from trying.” Wading through the remuneration policies of listed firms “deserves a bonus in itself: pages of dense text describing varieties of equity award with different triggers for vesting”, variously relating to share prices or other targets.
Shareholders need to wise up to all this. The fact is that BP shareholders “voted en masse for the very pay policies that spat out Mr Dudley’s pay rise this year” – a perverse outcome in which he was handsomely rewarded for a share price that fell a bit less badly than the worst of BP’s peers. That’s an odd definition of success, in anyone’s book.