PwC report on exec pay

PwC's latest report (PDF) on exec pay paints a grim picture of the current state of play:

Over the last decade, executive pay in the UK has increased significantly. The increase in pay has mainly been in the form of higher annual bonuses and long-term incentive (LTI) awards, which are nearly always performance related. As our previous research has shown, the outcome has left almost everyone dissatisfied:
􀁕􀃊 Generally management feel that incentives have become too complex and prescriptive, and are not aligned to the business strategy or within their control. As a result, they do not believe incentives drive performance or change behaviours and many perceive incentives simply to be a lottery.
􀁕􀃊 Many institutional shareholders believe there is a tenuous link between pay and performance. The shareholder perception is that incentives ratchet up each year in line with annual benchmarking while incentive design and performance measures chop-and-change depending on management’s expectation of them paying out (or not). Underlying these perceptions is a feeling that remuneration committees are not being tough enough and exercise poor discretion that always favours executives.
􀁕􀃊 Remuneration committees are caught in a calibration hell trying to design incentives that are durable and balance the expectations of executives and shareholders.
􀁕􀃊 Few really believe that complex long-term incentives retain executives; they just make it more expensive for a new employer to buy-out the executive with golden hellos and guarantees.
􀁕􀃊 The public, particularly since the banking crisis, see executive pay as nothing other than a gravy train – pay regardless of performance rather than pay for performance.

I think this summary is pretty much on the money. We are in a strange scenario where many people (regardless whether managers or investors) seem to think that the system isn't working, and more of the same won't make any difference, yet there are no significant moves to challenge the fundamentals. Given this background there is the potential for really significant reform which could spill over into other areas. But I think many investors are stuck in a mindset that sees any critique of performance-related rewards as running the risk of letting directors get away with... something. So the opportunity is not being utilised. Yet.

Fascism

Just a thought, from The Great Transformation:

A country approaching the fascist phase showed symptoms among which the existence of a fascist movement proper was not necessarily one. At least as important signs were the spread of irrationalist philosophies, racialist aesthetics, anticapitalist demagogy, heterodox currency views, criticism of the party system, widespread disparagement of the "regime", or whatever was the name given to the existing democratic setup.

Behavioural bin banter

George Osborne's article with Richard Thaler has taken some stick. One bit stuck out to me.

Because the academic literature shows the importance of a way a decision is framed, the Conservative party is working with councils to replace Labour's bin taxes with schemes that pay the public to recycle. In Windsor and Maidenhead our pilot scheme has already increased recycling rates by 30%.

This is interesting for a number of reasons. First is the shift away from fining people. One of interesting stories in Dan Ariely's Predictably Irrational is about an Israeli day care centre that started to fine people who picked their kids up late. The result was that the number of parents picking kids up late went up. Ariely suggests that this is an example of a social norm (a responsible parent should pick their kids up on time) being replaced by a market norm (a bit of extra time costs/can be bought). So actually you can see a reason why fining people might not be the best approach to achieve the desired behaviour.

However coming from another perspective, one could see how paying people to recycle might also have a negative effect, because it might crowd out intrinsic motivation. The first third or so of Dan Pink's new book Drive (which I've mentioned previously) covers how and when this happens. On balance I actually think this is unlikely, because whilst I might be intrinsically motivated to recycle the task itself is repetitive, and Pink's review of the research suggests that actually tying rewards to such tasks can deliver. (That doesn't mean that there won't be some people who are negatively affected by being paid to do something that they want to do, but it might not be a significant proportion).

However Pink also suggests that over the longer term dangling carrots can become less effective - and if you take them away (perhaps because the council needs to cut costs) there can be damaging results. The extrinsic motivation - the reward - has gone, but in the meantime intrinsic motivation has been eroded by the introduction of payment.

Chuck in another concept - loss aversion. Given that we are supposed to feel losses twice as much as gains, wouldn't we think that actually fining ought to work more effectively? So maybe we should question if there something else going on that has caused the changed behaviour?

But finally, does this initiative necessarily have anything to do with framing (or any kind of insight from behavioural economics), as is suggested? The results could just come from the way the incentives are structured. The fine may not have been large enough to make incurring the cots of recycling (ie lost free time) the most attractive option. In contrast the council may now be paying more than is necessary to get people to give up the time to recycle. The jump in recycling could easily be a perfectly rational response to the incentives on offer.

Would be interesting to find out a bit more about the scheme to see the real story. I'm not convinced this article has nailed it.

Myners plans to write to CIOs over remuneration

Paul Myners is keeping up the pressure on institutional investors to take remuneration reform seriously. Below is from an exchange in the Lords yesterday:

Lord Dykes: My Lords, I thank the Minister and HMG for their commendable efforts to try to get a much more civilised regime here. We are now armed with a much more robust and alert FSA. We have the Walker proposals. We have the EU getting stuck in with its wider framework. We have Stephen Green of the HSBC and BBA with his interesting revelations on dodgy practices to have artificially structured bonuses. Then along comes Goldman Sachs with around 300 £1 million snouts in the trough-that is just the leading partners and leaves aside the traders and what they will get-completely undermining the official effort to get civilisation in this whole regime, and other bankers now, privately and with their cronies, the traders, once again quietly preparing to unleash excessive bonuses when the time comes-

Noble Lords: Question!

Lord Dykes: This is a very important matter. I know the Tories have different views. It is a complete free-for-all. They do not mind at all. Can the Government at long last persuade the big institutions in this country really to insist on proper behaviour?

Lord Myners: I am grateful to the noble Lord, Lord Dykes, for his pertinent and correct observations about many aspects of the culture of bonus payments in banks. I, too, was very struck by the comments of Stephen Green, the chairman of HSBC and the British Bankers' Association. He described inflated and distorted structures of bonuses and argued for lower and more rationally calculated figures in the future. The Government's perspective is that bonuses must, first, be a matter for the shareholders, subject to the banks being adequately capitalised. Secondly, the bonus system should not contribute to unmanageable risk. Then it falls to the shareholders. I am afraid that the shareholders, notwithstanding the comments from their trade associations, appear to have been less than fully engaged with that matter.

I intend to write to the chief investment officers of the major UK institutions in the next few days, asking them to share with me the actions they have taken to ensure that boards of directors are aware of their position on the payment of bonuses. It seems extraordinary that, over 10 years, an investor in UK banks will not have had a positive return at all. Clearly, the traders and senior executives of these banks have earned huge amounts. This is a distortion of the consequences of trade to the employees, away from the owners. The owners need to be more concerned and the pension funds need to ask their fund managers, "What are you doing to stop this process?"

Would be interesting to see what kind of replies he gets. Will they be made public, or is an FOI request in order?

A share-owning democracy... or not

From the Daily Telegraph, 10th January, 2010:

new estimates from the Office for National Statistics appear to show that Margaret Thatcher's dream of creating a shareholder democracy has taken root.
The ONS found that 15pc of British households – 3.75m – own some shares directly on the London stock market.

From the Daily Telegraph, 27th January, 2010:

Just 10.2 per cent of the value of shares traded on the UK stock market were held by individuals at the end of 2008, down from 12.8 per cent two years previously. This fall equates to a substantial decline of £120 billion.
Back in 1964 more than half of the UK stock market - 54 per cent - was held by individuals.
The data highlight how the Thatcher revolution in private share ownership failed to create a lasting impression on the stock market, while more recent turmoils in the market such as the dotcom bubble bursting and the financial crisis of 2008 have led to individual consumers owning ever smaller share portfolios.

errr...

Actually if you read both articles the stats make sense - one study takes a wider view than the other. But you might have thought that the Torygraph might read it own news.

Motivational blah

I've been thinking quite a bit lately about pay and motivation. On the bus home tonight it struck me how little pay affects how I work, let alone how hard, and I can't believe that this isn't true for lots of folks.

To get into this first a very basic take on the framework I think I am using to approach work. I think I have a sense in my head of what the broad objectives are for my job. Then below this are a set of broad tasks that I am required to undertake, and below that sit the day to day stuff that needs doing.

In terms of motivation I sense that the things that drive me to work are either pure enjoyment (because I like getting stuck into a particular task) or a slight sense of dread (can't think of a better word) that if I don't get moving I will not be delivering what I understand to be 'doing the job properly'. But broadly I am using the above framework to judge how I am doing and whether I need to do more. I do not consider the financial arrangements of the job. (As an aside I would add that when I worked at the TUC I also felt a very strong responsibility to try and work in a way that I thought was genuinely of benefit to union members. I'm not claiming that's what I actually did (!) but a broader sense of responsibility was a definite factor in how I approached the job.)

I can honestly say that in none of this does the amount I get paid even enter my head. Going further I can't see how my pay could be structured in a way that would actually get me to do my job differently, because a) I can't see how you could measure some of this stuff in order to tie rewards to certain bits of it and b) I think I would carry on largely as before in any case.

Just as a quick example, in a previous job I was offered a reasonable bonus if I recruited someone for a given role within a short space of time. We quickly interviewed two people who I thought could have done the job well, but neither wanted it. After that I was unsure about other candidates and as a result didn't appoint someone within the timeframe so no bonus. So did the incentive of the bonus work or not? In theory I could have appointed someone I wasn't convinced by to get the money, but I didn't. In practice I think it was simply a dumb idea to tie a bonus to a task like this, but hey.

In fact when I think about it what I get paid has far more importance in my non-work life (making sure the mortgage is paid etc) than in influencing how I work. Maybe if bonuses were a bigger part of it that would make a difference, but in reality I don't think so. I'm interested in the finding that tying rewards to tasks can actually make performance worse, because I think this is exactly how I think I have reacted in such a situation. Instead of simply trying to reach the best decision/do the best job the overhanging knowledge of the incentive makes you second-guess yourself.

Anyway, enough blah for now, but this is a topic I'll be returning to, you lucky people.

A small chunk of Cadbury's

I'm not surprised to not find myself agreeing with Jeff Randall about Cadbury's, but I found the following para in his opinion piece interesting:

Valuing companies is a subjective business; it's what makes markets go up and down. But for those union leaders and investment managers who insist that 850p a share is a rock-bottom price, there are questions. As recently as last April, Cadbury's shares were 500p. So, why wasn't Unite's pension fund piling into the stock at that time? How many of the City's wise guys spotted all that value before Kraft turned up?

The key point I want to address is in the last sentence. The question effectively is why didn't fund managers (I assume that is who he means by City wise guys) realise Cadbury's was worth 850p earlier. There are several answers to thus. Firstly, of course, they may well have thought this. Excuse me stating the obvious but a key strategy in fund management is to try and spot companies that are trading below what the manager thinks they are worth and by their shares in order to make money when the market comes to that same valuation. You don't wait until the company hits the price you think it is worth and then buy it. So there may well be managers that bought into Cadbury when it was trading at 500p because they thought it would increase in value.

Secondly, in theory all kinds of factors could have affected how investors valued Cadbury last April compared to how they value it now. In fact presumably if you think that market prices tell us something useful, that it's signal rather than noise (which is presumably what Jeff Randall must believe to some extent to use changes in share prices to make a point), then that's exactly what we must believe. Otherwise why would the price move to such an extent?

Thirdly, in practice we obviously know that there has been a significant development that affects the valuation of Cadbury's - the Kraft bid. Some of those investors that valued Cadbury's at 500p previously and 850p now may believe that the deal will create value. Or they may simply be punting on the shares going up because of the bid. The point is that you can't isolate the current valuation and the bid. The current price wasn't there to be "spotted", as he puts it, because the deal and its implications weren't part of the story.

And finally, and most obviously, he seems to be ignoring the fact that the whole market has increased dramatically since last April (having hit bottom in March). You might as well ask why was everyone so negative about economic prospects last spring compared to now. And I suspect that if you go back to April last year the one thing you won't find are opinion pieces from Jeff Randall predicting a bull market, because that in turn would imply optimism about economic prospects.

PS. Any thoughts on what Jeff would say if union pension funds had piled into Cadbury in a big way last year and had made money out of it? I suspect he would have called them opportunists/hypocrites/capitalists or something similar.

Krafty cuts 2

A few random thoughts on the deal...

1. The real issue for me is, as always, ownership but I have a slightly different take on this than others. My problem is that no-one in the system really seems to be representing the interests of the ultimate owners. The management of both companies, as is well understood, are agents so we shouldn't be too surprised if Kraft's management wants to empire build. The Cadbury board is in the same agent position. They no doubt know the disastrous track record of much M&A, but they've got a good price, hence they can claim to be acting in the owners' interest in the short term.

Many of the fund managers likewise are saying that they would rather that Cadbury stayed independent but there's good money on the table. Again they probably expect the deal to have a lowish probability of really delivering, but in the short term the cash is there. The punters who sit behind the fund managers - ie the real owners - are nowhere involved, despite Unite's efforts. They might well think that the long-term success of both companies is more important (since their shares are probably held via a pension which will pay out for decades). And personally I would question if in future the firm-specific investments made by employees should hold more sway.

2. A simple point but a fundamental one - this deal probably won't deliver. Lots of studies demonstrate that many deals destroy rather than create value. Kraft shareholders may well lose out in the long-term just in these terms.

3. Lots of people will actually be on both sides of this deal. For example, UK pension funds typically invest the biggest chunk of their overseas equity exposure in the US. Many surely will hold both Kraft and Cadbury. This is a bit of a problem for those who play down concerns about the deal by arguing that it's a good deal for Cadbury shareholders, and it's Kraft shareholders' problem if they're overpaying. Actually it can be both for some investors. In this case the deal surely looks like a pretty stupid thing to back, especially given all the cash leaking away to various advisers.

4. And those fees... As I've argued before, I think any radical reform of the financial system must focus on fees. Because no-one is really acting in the ultimate owners' interest, no-one challenges all the money leaking out to advisers of various kinds - because it's not their money. According to one estimate £250m will have been peed away on fees in this deal. Yet oddly some people are more annoyed that RBS is involved (what do investment banks do?) than the amount. Again I think it's partly that we've just got used to deals costing a lot of money. But why doesn't someone try and exert pressure on the fees?

UPDATE - Andrew points out that Warren Buffett is still not impressed by the deal.

More on bonuses

There's a decent piece by Patrick Hosking in The Times taking a look at different approaches to controlling bonuses and how likely they are to result in change. Notably he suggests that the FSA's intervention is likely to be the most effective.

Here's what he says about shareholder activism on pay:

Collective action by shareholders has been timid. One wonders how sincere the institutional investors are about reforming banker pay. Many of the biggest fund management groups are owned by banks; almost all of them are beneficiaries of the same flawed bonus system — one that rewards short-term success and buys into the notion that financiers are hugely talented.

Shareholders should be the solution to the bonus problem. In fact they are self-serving agents who have become part of the problem.

Interestingly the book I blogged about recently makes the same point. If the fund management industry pays highly, how likely is it to rock the boat.

In practice I suspect that individual who could make a difference don't deliberately take a soft line on remuneration because they want to protect their own income. But I reckon it must be hard to take a challenging line on such issues as it may well be seen - or the individual may fear it will be seen - as an attack on City culture. I think there remains a deep cultural antipathy towards governance activism in institutions as a whole. The corp gov people might be very sincere, but the organisation doesn't buy it.

Do bonuses work?

Eh?

a new book by Boris Groysberg, an associate professor in the organisational behaviour unit at Harvard Business School, entitled Chasing Stars: The Myth of Talent and the Portability of Performance, makes an intriguing point: maybe it doesn’t matter a great deal if RBS loses these people.

Wall Street and the City are wedded to the idea that success depends on the talent and flair of individual bankers, with David Buik, for instance, arguing that bankers deserve their cash because “it takes a very special combination of talents to work in the city. It’s a very special gift”. Groysberg’s analysis of more than 1,000 star analysts at 78 investment banks, and 20,000 non-star analysts at about 400 investment banks, suggests otherwise.

“Exceptional performance is far less portable than is widely believed,” he says. “We found that mobile stars [bankers who leave one company for another] experienced an immediate degradation in performance that persisted for at least five years. Thus their exceptional performance at their prior employer appears to have been more firm-specific than is generally appreciated. Financial compensation is a lever [in motivating success] but it is not the only lever and it is the most overused lever. Banks behave as if stars deserve and should appropriate all the value they generate, but stars without the companies they work for might not be stars.”

Which leads us to the other argument often made in favour of dishing out bonuses: the idea that lump sums are a great way to enhance performance. If you offer someone £100 to, say, compose an advertisement for a company, with a £150 bonus for doing a particularly good job, then he or she will do a particularly good job, right? But there is research to suggest that this is not necessarily the case.

In 2003 the Harvard academics Nancy Katz and Michael Beer asked more than 200 senior executives in more than 30 countries about their bonus intentions — only to discover that the vast majority of those executives thought that bonuses had little or no effect on how their employees or businesses performed.

Etc

Krafty cuts

Lots of reaction to the Kraft-Cadbury deal. A bunch of links on Touchtone here.

Unite reaction here.

And Warren Buffett says it's a bad deal.

Top 10 LGPS facts*

More from the GMB...

1. The LGPS is a funded scheme like private sector defined benefit schemes and unlike the other public sector pension schemes. Together the 101 LGPS funds hold more than £120billion in investments and assets, enough to pay benefits for over 20 years

2. The LGPS has a positive cash flow, with income from investments and contributions exceeding expenditure on benefits by £4-5billion every year

3. Members contribute an average of 6.4% to the scheme with higher earners paying proportionately more

4. The employer contribution rate for current service is 13.6%. In the private sector the comparable employer contribution average is 15.6%. Many employers are paying a high overall contribution to the scheme because of past underfunding and contribution holidays

5. The LGPS is collectively the biggest pension fund in the country and fourth largest in the world making it a major shareholder in business and the UK economy

6. Four million people are members of the LGPS in England & Wales either as active, contributing members, pensioners or deferred members

7. In April 2008 (2009 in Scotland and Northern Ireland) reformed schemes were launched covering all existing and new LGPS members that changed the benefit structure and increased average member contributions to the scheme from 5.8% to 6.4%

8. In the last year income from employee contributions to the scheme has increased by 15%

9. More than 7,000 employers participate in the LGPS, many of which are private sector companies providing local public services

10. Not gold-plated, the average pension in payment from the LGPS is around £4,000 a year, for women the average is £2,600

* - Bryn has rightly picked up on my misuse of the word 'factoids' in the headline, so I've changed it.

GMB defends the LGPS

The debate about pensions must not be allowed to become a race to the bottom says GMB
19 Jan 2010
GMB and other Local Government unions today published a list of ten key facts about the Local Government Pension Scheme (see notes to editors below). In doing this the three main local government unions are seeking to set the record straight about a pension scheme with over four million members and £120billion in assets.

The facts are that the new LGPS, introduced in April 2008 for all the schemes 1.7m contributing members, was agreed by employers, unions and government after several years’ informed discussion. All stakeholders participating in that debate accepted the new scheme as a sustainable and viable means of pension provision in local government for the long term.

In exchange for increased member contributions and benefit reform, employers agreed to a scheme requiring councils and other LGPS employers to contribute on average 13.6% of members’ pay year on year. The income to the scheme from members since the introduction of the new structure has increased by 15%. The average employee contribution to the scheme is now 6.4% (higher than the UK average of 4.9%). In addition the LGPS was at the forefront of introducing higher contribution rates for higher earners, a concept now being proposed by government across the public sector.

The current LGPS is not the cause of increases in Council Tax or cuts in local services. In fact money equivalent to less than 6% of Council Tax revenue goes towards the LGPS, about £70.50 a year for an average Council Tax paying household in England. The numbers being peddled by those opposed to quality pension provision in the UK are dangerously misleading for a debate that should be considered not a forum for shallow point scoring.

Of that contribution it is the funding owed for past service that is often the greater part. Past underfunding by employers has meant that insufficient funds have been put aside for future pensioners. However, as a funded scheme, unlike the others in the public sector, the LGPS has over £120bn in assets, a figure sufficient to pay benefits for more than 20 years without any additional contributions being made. In addition the LGPS receives £4-5bn more in income than it spends in benefits every year, ensuring its enduring viability.

Even in the current economic climate the LGPS received nearly £3bn in income from its investments in 2008-9. The scheme is a major shareholder in British businesses, property and regeneration. This is on top of the contribution it makes to the income of more than one million current pensioners many of whom would be entirely reliant on taxpayer financed state benefits if it wasn’t for the Local Government Pension Scheme. The average pension of £4,000 a year (£2,600 for women) does not lead to a gold-plated retirement but it does mean members have some security in later life. The local government trade unions believe that the drive to the bottom approach to pension provision being led by the Conservative and Liberals will lead to millions more pensioners suffering and significantly increased pressure on public services.

Heather Wakefield, National Secretary for Unison said, “The cost to the taxpayer of abolishing the LGPS would be high. If our members did not pay into the scheme, the taxpayer would have to foot the bill through state pensions. The private sector has shown itself happy to use taxpayers’ money to cover up its mistakes and poor decisions. They should stop talking about what does not concern them and put their own house in order. Our members – almost three quarters of them women – work hard to provide public services on low pay and have sensibly decided to contribute to a safe and well-funded scheme. Two thirds of them earn less than £18,000 a year, so their pensions can hardly be gold plated. The scheme must continue”.

Brian Strutton, National Secretary for GMB said, “Let’s be clear, the debate about pensions must not be allowed to become a race to the bottom. The private sector must stop cheapening their workers’ pensions or we’ll have future generations of pension paupers relying on state benefits. Let’s also stand up for the LGPS which is affordable and sustainable for the long term to provide future pensions for some of the lowest paid workers around; workers who will fight to protect their pensions.”

Peter Allenson, National Officer for Unite said, “The LGPS is clearly sustainable given these details brought together for the Trade Unions who are determined that the myths that some are peddling should be exposed as the scare mongering they clearly are.

The LGPS is not gold plated but actually through its investments and benefits bring real value to Local Communities.

Everyone should bear in mind that the scheme was reformed in 2008 with some benefit changes and increases for employees in their contributions with the Government and employers being party to the new scheme.”

Interesting argument on pay...

We've got a review copy of this book at work. It's short & sharp and very sceptical about the idea that rewards in the corporate sector reflect talent. He also spends a bit of time looking at the argument that exec pay, or pay in the financial sector, is comparable to rewards for sports and movie stars.

One good argument he floats here is the 'Faking It' one. Could a fit young bloke who wasn't a professional footballer get away with pretending to be one, as in be able to get paid for such a position? The answer is pretty obviously no. Their lack of genuine athleticism, let alone skill, would be exposed very quickly. But could we say the same thing about people who work in the finance sector? Could we even say it about chief execs?

And there's also the lack of transferability of skills. No-one would expect that a top footballer could simply decide that they want to transfer to the top level in rugby and be able to achieve such a move. Yet executive skills it seems are transferable between industries - you don't need to know the underlying industry.

The suggestions on how to deal with the pay problem are less convincing. But the attack on conventional wisdom about exec pay (as parroted, unfortunately, by many investors) is worth a read. And you can get through the whole thing in a couple of hours.

My David Cameron

Via Tom, a really easy Cameron poster generator. Here are two of mine.

Excellent article

By John Plender in the FT, here. This sets out a lot of the problems with relying on shareholders to address issues like remuneration. What I really like about it is that it doesn't end with some bullet points for 'what needs to change'. We still have a long way to go on that score.

Unite on Kraft/Cadbury

Long overdue plus for this. There's a shareholder briefing available for any investors wanting to hear the employees' perspective.

Select committee snippet

I’ve managed to get hold of the transcript of Stephen Hester’s evidence to the select committee earlier in the week. Having had a read through, I have to say that he comes across much better than the media coverage would have suggested. The ‘holidays’ comment was right at the end, when the session was winding down and, as such, where he might have expected to get away with a slightly less serious comment. Still a bad approach IMO...

Anyway this little exchange between Hester and John McFall is interesting.

Chairman: Yes, but you have a fair idea what is happening at the moment as you come to us. Have institutional investors raised concerns or given you directions on bonuses?

Mr Hester: My summary of the position as I understand it from our institutional investors is that they are all highly conscious of the very difficult challenges that exist in turning RBS around successfully and making them money. They believe that we need highly qualified and motivated people to do that and to compete against people, and they want to make sure we have that. Subject to that, they would like the biggest profits possible and therefore the lowest bonuses.

Chairman: So the answer to my question is they have not raised concerns or given you directions?

Mr Hester: They want us to optimise the balance between having the lowest possible expenses---

Chairman: I think it is a very simple question, Mr Hester. Have they raised concerns or given you directions? That is all I want. Just a simple answer.

Mr Hester: They have raised concerns about our ability to keep and motivate good people. They have raised plenty of concerns
about that, and the institutional shareholders all continue to have rules as it relates to remuneration on the other side.

So McFall is basically asking whether institutions are giving RBS a hard time over bonuses. And the answer seems to be ‘no, they want us to pay a lot’. Right? In other words their principal concern seems to be that RBS doesn’t pay bonuses that are too low.

Fred's got a new job

Fred Goodwin - former chief exec at RBS - now adviser to RMJM

And the rest...

Adam Applegarth - former Northern Rock chief exec - now an adviser at private equity firm Apollo Management

Andy Hornby - former HBOS chief exec - now chief exec at Alliance Boots

Tom McKillop - former chair of RBS - now a director at UCB

Steven Crawshaw - former chief exec of Bradford & Bingley - ill-health early retirement

Motivation & pay

I can't tell if it's just me looking for something I want to see or whether there is a bit of interest developing in non-financial motivation. I've been thinking since the financial crisis hit home that an opportunity exists to have another look at whether big piles of cash (or shares) actually work as incentives. It's why I think some of the Left commentary about bankers' bonuses misses the point.

The amounts paid matter to some extent, but surely more so is whether they actually drove the 'wrong' behaviour or not. Your answer to this second point matters quite a bit and unfortunately much of the focus on restructuring bonuses and other incentives (which I agree is necessary, but for other reasons) is built on the implicit assumption that this form of incentivisation does work, for good or ill. So those on the Left arguing for bonus reform need to be aware of this.

Personally I'm sceptical bonuses drive behaviour, as I've said many times before, and it's notable that the FSA, or at least Adair Turner wasn't that convinced either. And this is quite apart from the question about whether it is possible to effectively tie the reward to the right targets in the first place. If we start from this point we could have a much more interesting discussion about bonuses and other incentives.

Anyway, as I say I think I'm picking up a bit of nascent interest in broader questions about motivation. A couple of people in the governance world do seem to be sniffing around this stuff. The Daniel Pink book I referred to recently could be a useful way to popularise this debate. But it would be really good to get some decent research done in the investor world.... here's hoping.

Mandy again...

Well today is the day of the summit between various govt ministers and institutional investors to talk about the ownership agenda. To tie in with it Mandy has an article in the FT. The end to it is quite nice:

A healthy approach to mergers and acquisitions needs to reflect the same commitment to good management in both the long and short term. Nobody denies that a change of ownership can be a good thing for a company. There can be economies of scale or the possibility of technology synergies. It can create new value over time.

But the open secret of the past two decades is that through poor valuation or aggressive cost-cutting, too many mergers fail to create additional long-term value in the merged company. For this reason, companies making acquisitions should set out an objective analysis of the potential gains and be entirely open about their intentions for the workforce, while shareholders on both sides have to be genuinely critical.

Directors should expect to run the gauntlet of public and shareholder criticism if they have done their homework poorly, plan to load companies with heavy debt, are motivated chiefly by the desire to strip assets or simply want make a quick profit off the share price with little respect for the workforce or local interests.

Free-market true believers will no doubt say that any distinction between types of share ownership in publicly owned companies is irrelevant. Most people buy a stake in a business to make money, and they will take a short-term profit over long-term investment. It is not at all clear this must be the case.

It was Keynes who first likened share trading to the superficiality of trying to guess the outcome of a beauty pageant. Britain’s industrial future depends on it being something more than that. It is time to restart the debate.

Spot on.

Cadbury test case

The Government seems keen to make the Kraft bid for Cadbury's a test case of whether shareholders are really now taking their ownership responsibilities more seriously. According to various reports, tomorrow Mandy is due to meet with a group of key institutions and some representative bodies to stress the importance of the forthcoming stewardship code and talk chocolate.

Regardless of what you might think about the bid - and I have to say I haven't heard many institutions talk favourably about it so far - this has to be a good thing. If Labour is serious about this kind of stuff a) it's vital that BIS and its ministers are part of the initiative and b) we need a clear cut example to focus on. This bid fits the bill.

I bet it will be an interesting meeting. Worth having a quick look back at recent M&A activity - even though the value creation track record is unconvincing to say the least I can't think of many examples of institutions holding out against bad deals. RBS-ABN Amro is the obvious one here. The only institution I know that opposed it was..... Co-op Asset Management.

Hester's holiday howler

Interesting to note that the thing that seems to have annoyed many people the most about Stephen Hester's evidence to the select committee yesterday (still waiting for the transcript) was not the defence of bonuses. Rather it was his reponse to how he would deal with the public reaction to bonus announcements:

"I might go on holiday for a long time."

Mrs P was spitting feathers, as, it seems, were quite a few unpolitical people judging from conversations this morning. Maybe the it's the slighty 'naughty schoolboy' tone of it, or the apparent lack of seriousness, or the fact that many people aren't even thinking about holidays. In any case it was badly misjudged.

Tory guff about class war

I'm not convinced that any kind of "class war" strategy is the way the get people to vote Labour, and it's worth pointing out just how little evidence there is of such a strategy in operation. There's the joke about Eton and... err...

But one thing I am sure about is that it's total rubbish - willingly lapped up in some quarters - that the Tories somehow positively enjoy Labour talking about class. This is patently obviously a weakpoint for NuDave and Gideon, hence all the stupidity about double-barrelled names.

Not worried at all, honest guv...

Mr Cameron is seen to be on the side of the rich over ordinary people, by 50 per cent to 42 per cent.

The joy of snow

Quick question

Does anyone know what happened to equities the day of the 1997 Budget? Given that the Government abolished tax credits on dividends you might expect them to have dropped, to take account of the diminished future income stream that must surely have been expected. Or had investors already factored the probability of tax credits being abolished into their valuations?

I don't remember there being a big drop on the day, but maybe I'm mistaken. So if not, what's the story?

Bloggers down....

Have Charlie and Duncan hung up their keyboards?

Sorry, NAPF!

In last night's post I contrasted the ABI's recent missive to the FTSE350 with the apparent silence on the part of the NAPF and the IMA. It turns out that (not for the first time) I shouted into the internet too quickly, and that the NAPF had actually also written to the FTSE350 with its own concerns about remuneration back in November. So there you are.

Hat-tip: Cheapside House Command Bunker

Bits & bobs

1. Saturday's FT editorial here about the return of bonuses in the banking industry is worth a read. It's very sceptical that this has much to do with the value of what is being provided by those getting the rewards, and the key point is that basically shareholders are being (willingly?) taken for a ride.

2. But then over on the Torygraph we read about how the ABI (yep, them again - where are the NAPF and the IMA?) is warning companies to be sensible about pay of face opposition.

3. A quick snippet from a book that I ordered at the end of last year that I'm yet to start, but which looks well interesting - The Ownership of Enterprise. It takes a look at why different forms of ownership appear in different industries, so quite a lot in there about employee ownership.

In firms that are incorporated... formal control generally involves only the right to elect the firm's board of directors and to vote on a relatively small set of fundamental issues, such as merger or dissolution of the firm. Moreover, in large business corporations the shareholders, who have formal control, are often too numerous and too dispersed to exercise even these limited voting rights very meaningfully, with the result that corporate managers have substantial autonomy.

Err... that's all you really need to know to get started in the ownership debate right now, isn't it?

Labour Against The Machine vs Dave Cowell-eron

In one corner a left-wing outfit led by a frontman (allegedly) prone to expletive-laden outbursts, achieved mainstream popularity in the 1990s, but their support has faded away since.

In the other corner a highly-polished newcomer. He certainly looks and sounds the part, but his lyrics don't seem to actually mean anything, and you feel like it's a synthetic product somehow.

I'm with Cheryl Cole this time.

What a 'no frills' council looks like

Here & here.

Retirement NEST-egg

Not sure I like the new name for Personal Accounts (itself the new name for the National Pension Saving Scheme), which is the National Employment Savings Trust (NEST). Presumably it's from the school of marketing that says you must have an acronym that means something. Anything.

If you really are interested in such things PADA has a doc on its website explaining why it went with NEST. It's here (PDF).

Person on the internetz is WRONG

Both ConservativeHome and Iain Dale had an emotional spasm at the end of December because of a Tweet by Sunny Hundal celebrating Rush Limbaugh's hospitalisation. Iain said:

I think this demonstrates a key difference between elements of the left and the rest of us. I can think of no left wing hate figure whose hospitalisation or death I would celebrate, either openly or secretly.

The funny thing is, I seemed to remember Iain Dale Twittering a comment from his partner about how the demonstrators at a G20 demo should be shot. He denied this, but look what I found in his Twitter archive today:

Just give the Police guns, and shoot the lot of them. That was my partners reaction to the riots in the City. Quite liberal of him really...
1:12 PM Apr 1st, 2009 from Twadget

And this was at the demo where Ian Tomlinson died unfortunately. Obviously it's a jokey comment, and it's not aimed at a specific lefty, but isn't the sentiment openly seeking the hospitlisation or death of people whose politics you don't like? Does it become OK if it is jokey? Or not about a specific person? If so why so?

Now personally I think we are all old enough to deal with offensive blogs, Tweets etc, and especially those who link to Guido shurely? But what's sauce for the goose is sauce for the gander. Bit hypocritical innit?

Mandy snippet 2

Having just spotted this post on S&M, how about this?:

At the same time we need to accept that the current structure of most public companies is better at rewarding enterprise in senior management or owners than it is at giving the bulk of the workforce an incentive to innovate or commit to the business. The evidence is that companies that share rewards with their employees, like the John Lewis Partnership, are also very good at pursuing long term growth strategies.

From the same speech I linked to last night.

Pensions blame game

A couple of posts on the decline of decdent pension provision that are worth a look. Calvin here, and Matthew Taylor here.

I disagree with Matthew's argument that unions are in part to blame for the collapse of DB, because they weren't willing to negotiate a partial retreat (though in the comments he says he's taking his cue from the lack reform of public sector schemes). I think most union pensions bods actually despair that they were unable to do more to mitigate the dismantling of DB by private sector employers. In reality the unions (for various reasons) were unable to put up much organised resistance.

Calvin meanwhile takes aim at the ACA's argument that public policy is to blame for the decline:

the plethora of reasons why quality schemes have been closed in recent years stacks so high that to pick out failures of public policy seems, by itself, to be somewhat perverse: in my view, reasons why company schemes are closing are little to do with public policy and more to do with companies exploiting a period of worker weakness to erode a vital (and admittedly costly, at the moment) part of employees’ terms and conditions of employment based on short-termist considerations and fuelled by accounting standards that are unsympathetic to the long-term nature of pensions provision. The tide of scheme closures, in the face of DWP attempts to deregulate provision, seems evident proof that the policy ‘failures’ lie less at the public level than the corporate one.

Likewise, any attempt by employers to use auto-enrolment to reduce their investment in pensions at the individual level, on the grounds that quto-enrolment will increase overall costs, needs to be seen not as a failure of public policy but a function of the same attack by employers on terms and conditions.

Not surprisingly this is much closer to my view of the world. I would only add that the really big factor in all of this is life expectancy. It is the thing that has really pushed costs up and it is also the factor that is not being adequately dealt with (which is where I reconnect with Matthew's perspective).

The private sector has not addressed the issue of longevity. It has simply passed the buck back onto the individual, whilst at the same time reducing its commitment. Moving from DB to DC does not.... err... affect how long people live. But it does affect who carries the risk, and how much they pay for it. Inb effect then, as Calvin suggests, the removal of DB is not much more than a deferred pay cut, affecting millions who don't realise it. It's as simple as that. And the Right's campaign to destroy DB in the public sector is nothing more than an argument for massive levelling down.

Mandy asks interesting questions

Apparently there's been some kind of Labour-related story today... but the thing I want to focus on is a really interesting speech given by Mandy at the Work Foundation, which can be found here. There are various interesting bits in it, but this section right at the end is worth a look:

Finally, we need to start a debate about how we build a stronger culture of long term commitment to sustainable company growth in this country, based on a strong compact between institutional shareholders and the corporate sector.

On one hand we need a system that enables shareholders to discipline poor management. But we also need to give management some scope to plan and build without the excessive demands for quick returns that characterise too much modern public company ownership.

I don’t have any easy answers. Our reforms of company law made clear the importance of directors taking a long term view. At the same time we have empowered shareholders. We are now evaluating whether this has changed behaviour in the board room – and among investors.

Chris Hogg has played a key role in this debate with his review of corporate governance, and it is time for Britain to take a long hard look at the questions he and others have raised. I attach the highest importance to the new Investor Code and will be meeting investors and companies next week in the run up to the further consultation by the Financial Reporting Council.

Takeovers provide a very clear test here - for all involved. Companies making acquisitions should set out transparently and publicly their long term plans for the assets they propose to acquire, including company headquarters, R&D sites and main plants. Although these remain commercial decisions, firms or investors should expect to brave the court of public opinion if they are motivated only by short term profit.

Surely investment managers should be judged on their long term growth and profitability, not their short term performance – and the same goes for CEOs. How many strategic and effective managers are being hobbled with the quarterly race to please the beauty contest of the markets?

There's not much new here, as previous posts on 1990s reports by Marsh and Shiller show, but at the questions are the right ones (and as he acknowledges there are no easy answers). I think the idea of reviewing the impact of what the Government has done to date - particularly to try and empower shareholders - is exactly right. In my opinion most investors, including those that make a lot of noise about stewardship, haven't used the rights they have effectively for example to challenge remuneration. And it's great to see another minister say this kind of thing along with Myners.

It's just a shame that this has come way way too late. Even last year BIS had time to say review the impact of a shareholder vote on remuneration reports. Now there is no time left.

Bits & pieces

I'm still easing myself into 2010, so not much blogging for now. Here's some other people's stuff though:

The latest Member Trustee News (PDF) from the TUC

Insight Investment's RI library has reappeared (hat-tip: Aled)

A great post from Hopi on Cameron.

Some 2010 stuff

A couple of books that are about to appear in the UK that caught my eye.

The first is Drive by Dan Pink. Basically he appears to argue for a fairly fundamental reassessment of how we seek to motivate people. There's a WSJ interview here, and his website is here. It looks like it could either be really interesting or a lot of guff - the one-word title and the cover put me off a bit!

Obviously I'm interested in whether anyone in the remuneration field would ever take this kind of thing seriously. At a seminar last year I asked a well-known (infamous?) rem consultant who has a background in psychology whether the incentive schemes in place actually affected behaviour and got a fairly crap answer in response (something along the lines that some people are greedy). It was a strange response given that they had just stated - quite reasonably - that directors would usually do the right thing even if they could cash in by behaving poorly.

There's some emerging interest amongst a handful of investors in looking at some of these other ways of motivating people. Maybe now's the time to have a proper crack at this?

Second is Identity Economics by George Akerlof and Rachel Kranton. Here's the blurb:

Identity economics is a new way to understand people's decisions--at work, at school, and at home. With it, we can better appreciate why incentives like stock options work or don't; why some schools succeed and others don't; why some cities and towns don't invest in their futures--and much, much more.
Identity Economics bridges a critical gap in the social sciences. It brings identity and norms to economics. People's notions of what is proper, and what is forbidden, and for whom, are fundamental to how hard they work, and how they learn, spend, and save. Thus people's identity--their conception of who they are, and of who they choose to be--may be the most important factor affecting their economic lives. And the limits placed by society on people's identity can also be crucial determinants of their economic well-being.

This makes some sense to me as there does appear to be evidence that how people see themselves has an impact on how well they perform. There's a bit in Predictably Irrational, for instance, where Ariely talks about the how Asian women performed differently in tests depending on whether they were encouraged beforehand to think of their identity in terms of either ethnicity or gender.

Two things

1. Nigel fisks a Sunday Times piece on public sector pay.

2. The dumbness of the Tories' Wisdom of Crowds rhetoric is rightly challenged.

Light at the end of the woods

Came across this metaphorical mix-up when Googling for polling stats:

“We’re not out of the woods yet, but at least we can see light at the end of the tunnel,” said a senior Labour official last week.

Needless to say it must be quite hard to see the light at the end of the tunnel if there's a wood in it.