Monday, 3 January 2011

Hutton Review on exec pay

I can't help thinking the answer is staring us in the face. Hutton says:
Counter-intuitively, the revolution in pay has been accompanied by great improvements in corporate governance and transparency.
But at the same time:
Over the 1980s and 1990s the executive remuneration package was revolutionised, in the United States and then in the UK, as shareholders employed greater use of share-based incentives that sought to tackle head-on the principal-agent problem.
Institutional investors are typically managers of portfolios of assets constituting many companies. They are paid to manage the assets according to their assessment of prospective risk and value rather than intervene actively in managerial decision-making of individual companies. Meanwhile individual shareholders have comparatively tiny holdings and have neither the resource nor power to deliver any change.
Using agency theory and the assumption of opportunistic managerial behaviour led to shareholders encouraging the use of equity-based and performance-related pay. Aside from the fact that I think this is a wonky model of managerial motivation, if we combine a push for big dollops of cash/equity tied to 'performance' with a lack of effective shareholder oversight (resulting from widely spread small holdings and little CG resource) wouldn't we expect to see exactly what we do?

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