Thursday, 9 October 2008

Exec pay - who needs shareholders?

Just confirmation that the FSA is going to issue a code in respect of bankers pay. Rather obviously this does not reflect well on the role of shareholders in policing executive pay in the financial sector. I don't think a single bank has even come close to losing the vote on its remuneration report over the past 5 years that mandatory pay votes have been in place. Yet now there is widespread agreement that pay was a driving factor in the mess the banks created.

Do shareholders (even the large institutional shareholders) take the wrong approach to pay, for example failing to assess the potential risk? Are they simply not that interested in pay as long as the share price is going up? If so do how do we get them to do the job properly? Have we completely messed up the way we remunerate those running businesses because we don't understand human nature? Perhaps big incentives trump intrinsic motivation to do the right thing. Maybe behavioural economics can help us get this stuff right in the future.

Whatever the case, shareholder oversight of pay in the financial sector has clearly not worked effectively and for now the job is being taken over by the regulator. But if that's right for banks, why not other public companies?

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