Monday, 1 November 2010

Not quite, Pesto

Via Touchstone I came across Pesto's blog on the IDS and IoD surveys of directors' pay. This bit stuck out:
But it is also probable that what we're witnessing in the pay disparity is another manifestation of the agency problem: irrational decision-making at listed companies which stems from the gap at listed companies between owners and managers.
Actually these days there is a lot of discussion about remuneration between the managers and the owners (shareholders) and many would argue, often for very different reasons, that this takes up too much time. There's a vote every year on pay policy, and often on new incentive schemes too, so shareholders have the tools to make a difference, if they choose to. The reality is that pay rebellions are rare and average oppose votes low - we reckon about 6% against a rem report this season, with the median a bit over 1%, and well under one in five companies registering 20% and up against. Shareholders in general, it seems, do not have a problem with exec pay.

What's more, those eye-popping IDS figures are driven in large part by bonus and incentive schemes. That is the performance-related bit of the package that is there because of fear of agency problems. It's supposed to align the interests of owners and managers. So the very thing that creates the bad headlines has a) been advocated by investors and b) been legitimised repeatedly by shareholders through whopping majority votes in favour of all but a handful of remuneration policies.

So arguably from a shareholder point of view nothing is wrong. But if we do think something is wrong then maybe what we see is not an agency problem - but an agency theory problem. The application of an inaccurate model has resulted in perverse outcomes. Just a thought.

UPDATE: Charlie points out Will has a rather ace post up on the same kind of issues.


CharlieMcMenamin said...

I agree - more substantially( i.e. he knows what he's talking about, even if I don't) Will also considers this issue.

Tom Powdrill said...

wow - great discussion going on there. cheers!