Friday, 9 January 2009

Pay problems

Here is a great piece about executive pay by the Standard's Anthony Hilton. It's right on the money from my perspective:
The institutions are up in arms but really they have only themselves to blame.

This is because, for the past 15 years, they have encouraged performance pay without ever seeking to define what they mean by performance, with results that arguably have been hugely damaging for British business.

At their worst extreme, irresponsible pay systems have played a major part in driving executives to take the risks that have all but destroyed the banking system.

But elsewhere, and probably more perniciously, they have encouraged short-term thinking, inhibited long-term investment and encouraged the exploitation of existing assets rather than exploration of new opportunities for the future.

They mitigate against long-term investment management, research and development and brand development, all of which take too long to pay off. They reward acquisitions-driven volatility much more than steady organic growth. They have rewarded people for making their businesses bigger rather than running them better, which is one reason why there are so many value-destroying and just plain daft acquisitions.

Performance pay schemes push managements to close down or sell difficult businesses rather than spend time nursing them back to health.

They encourage managements to spend half their time touting for a takeover bid so they can sell out and cash in even quicker, and they create a hugely unhealthy obsession with the share price in most boardrooms.

Managing that becomes more important than managing the business, and the most rewarding investment becomes a share buyback. All this has happened under the institution's noses but they have done nothing-about it.

I could have written that myself. I've seen numerous fund managers argue that both the absolute level of reward, or its level relative to other staff is unimportant. What matters is performance linkage. Yet the payoffs have become huge (meaning you can get big bucks very quickly) and, as the man says, most incentive schemes pay out quite a bit of the total, which suggests everyone is outperforming...

And obviously his argument that there is little thought given to the type of behaviour that such pay schemes encourage is right up my street. Is pressure for reform building?

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