Tuesday, 27 March 2007

Because you're worth it!

Executive pay is one issue where I become more left-wing as I get older. It's like that old line about hotdogs - the more you know about how they are made the less you want to eat them. The more I have learnt about executive pay the less convinced I am either that the levels are justified, or that there is genuinely a 'market' at work in setting the 'price'.

As the late great J K Galbraith famously once said:

"The salary of the chief executive of a large corporation is not a market award for achievement. It is frequently in the nature of a warm personal gesture by the individual to himself."

There is a great demolition of the argument that executive pay is a market on the Performance And Reward blog.

Today there is plenty of coverage of the pay Barclays president Bob Diamond took home last year. The Diamond geezer apparently trousered more than £22m in 2006, including a £10.4m performance bonus. It's big by UK standards, but let's not be under any illusion that executive pay is under control here. The rewards directors take out of companies go up year after year, easily outstripping, in percentages terms, pay rises for other employees in the same companies.

Shareholders have proved to be an ineffective force in bringing back some sanity to executive pay. If the people you pay for managing your money (the fund managers) ever graciously decided they might tell you the lowly punter how they use your money, in terms of shareholder voting rights, you would see that most of them nod through almost all executive pay policies. Only the really obviously bad ones ever take any flak. That implies that the problem is at the (extreme) margins.

I consider myself a fairly moderate lefty. But on this issue I think there is a serious problem, and I find myself genuinely sickened by some of the pay awards. If there is no serious attempt to rein in executive pay I really do think this risks undermining people's faith in 'the system'. Funnily enough some of the investor community feel the same way. Here's what the International Corporate Governance Network had to say a couple of years ago.

"We cannot ignore the societal impact of what seem to be unfair or disproportionate rewards being received. At one extreme there will be some people to whom any compensation above an arbitrary multiple of average earnings in an economy is wholly unacceptable. Our suggestions will not appease them. On the other hand, if the electorate as a whole reacts against a system that enables people to be remunerated on a basis that seems unjustifiable to any reasonable mind, then the managerial capitalism that dominates the world at present may be under threat."

Their full report is here.

Ten years ago the GMB mounted a high profile campaign against Cedric 'the pig' Brown at British Gas. What Brown got paid as a salary then would barely register as top-up bonus for today's executives. Maybe it is time for a renewed offensive on executive pay, this time through our investments?

Remember YOU have a stake in this. If you have a pension, or an ISA, somewhere along the line your money is being used to support (or oppose) executive pay policies. Find out what your fund manager is doing, and if you don't like it put pressure on them to do it differently.

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