Wednesday, 9 May 2018

Exec pay, again

Two bits in the FT caught my eye recently, and I think both are indicative of why executive pay will continue to cause fuel the public's belief that corporate boards are making out like bandits and there needs to radical action to tackle it.

First is this piece by Attracta Mooney, who sees the behaviour of investors around the monster LTIP awards to the chief executive at Persimmon as a significant event. She argues, correctly in my view, that the failure to vote down the remuneration report - even in a symbolic gesture - was a serious misjudgment.

Just to highlight a couple of bits:

The vote at Persimmon reinforces concerns that asset managers do not take the issue of excessive executive pay seriously enough. The suspicion is that because many portfolio managers and other figures in the fund industry are well paid, they are less willing to tackle contentious pay at the companies where they invest.

The situation at Persimmon brings into focus whether shareholders are the right people to police executive pay. If they don’t get fired up over £110m packages, what will it take? It also suggests that shareholders are out of touch. Survey after survey shows the public believe many bosses are paid too much: and consumers are the ultimate clients of asset managers. 
I think this is bang on. I've had various conversations with people in different bits of the weird world I inhabit (a crossover of unions, the City and public policy) who all feel the same way - if this wasn't too much, what is? Why don't shareholders ever pull the trigger?

As I've said before, personally I cannot in good faith advocate further attempts to strengthen shareholder oversight of pay, when it is so obviously ineffective. We've tried 15-20 years of it, it didn't work very well, so let's try something else now.

Which brings me on to the second piece, which covers an FT focus group session and polling looking at how swing voters react to both Labour policies and the Labour leader. To cut a long story short, there was very strong support for very interventionist policies in respect of pay - both tax increases for the top 5% of earners, and a pay ratio capped at 20:1. Notably, there is both strong support and little strong opposition to both, whereas other policies - such as corporate tax rises - are popular but also provoke a strong negative reaction from some.

Given Labour seems to be in stalemate with the Tories, perhaps riffing more often on these themes more regularly (as opposed to, say, foreign policy) would be productive.

More generally, both pieces suggest a few points that I think are emerging as common sense around exec pay policy:

  • Shareholder oversight is ineffective as a restraint on pay
  • Shareholders (which really means asset managers) hold views on pay that are far more accepting of high pay and intra-firm inequality than the public 
  • The scale of pay matters, not just the structure of it - it is reasonable to talk about fairness
  • Significant intervention is justified to tackle excessive pay
What policies might flow from this is another question. Personally I'm more interested in things like revitalised collective bargaining, profit-sharing and employee ownership and representation, to ensure that the workforce gets a fairer share of the wealth they create at source than taxing the top tier alone. But that's for another day.

One final point, if the above is roughly right, it's interesting that you could reverse each of these positions and get a lot of "sensible" people within the exec pay system (rem comm members, asset managers etc) nodding along:

  • Shareholders should have primary responsibly for overseeing exec pay as they have the right incentives to act
  • Shareholders are focused on the *right* issues, rather than populists and a misinformed public
  • Performance linkage matters more than scale, fairness doesn't really come into it
  • Interventionist policy would be counter-productive / dangerous

I've been hearing this set of arguments for as long as I've been interested in corp gov. But these days I wonder if trotting these lines out actually helps make the case for radical policy. Certainly each time I hear a right-wing wonk argue in public that exec pay doesn't really matter, and we should leave it all up to the shareholders, I feel like we inched forward a bit...

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