Wednesday, 18 May 2011

High Pay Commission 2

So, my thoughts. Rather than simply repeat what is in the interim report, I thought I'd pull out what I think are the most interesting bits. I would encourage people to read it, because there is a stack of useful data in there. But I want to focus on a couple of particularly important points, both of which I agree with.

First, much of what we see in respect of executive pay could be described as unintended of the corporate governance movement, such as it is. In particular the focus on performance related pay has allowed executives to extract ever more money from the companies they run. Because the default position a lot of shareholder adopt is that the amounts don't matter too much provided there is performance linkage they have, consciously, or otherwise allowed this too happen. The multiples of salary available as performance-based rewards have risen higher and higher, meaning that the potential pie has grown. Even a global financial crisis hasn't put a dent in it (look at the rebound in bonuses recently).

As the Commission states, there isn't much evidence that other governance reforms, like the establishment of remuneration committees, have made much of a difference either, and may have contributed to the problem. Again I think this is true. As someone put it to me recently no director wants to think they work at a company that is failing or underperforming, so pay has a function as evidence of success - both to the recipient and the rem comm making the awards. The Commission suggests that reform of rem comms is something they may consider as part of the recommendations, something I would definitely support.

Second, as the report suggests, digging into these issues raises deeper questions about the nature of ownership. Suppose we conclude, for a variety of reasons, that corporate governance reforms and shareholder oversight are insufficient to address executive rent extraction. OK, then maybe the state intervenes in some way, or we give another group, like employees, more say. But if agree this is the right path, one has to question why only pay is in the category of 'too difficult for the shareholders to solve'. As I have been bleating since the crisis hit, these are the threads that are left hanging if shareholders don't act more like owners. Don't be surprised if people start to pull at them.

The only other thing I would add is that the Commission could take a look at the literature on incentives and behaviour, because I think there's plenty of evidence there that performance-related pay is unlikely to be effective in boardrooms in terms of improving (rather than rewarding) performance. This is important because, oddly, what it may mean is that we are essentially giving execs a lot of money on moral grounds (good behaviour should result in extra reward) rather than economic ones.

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