Thursday, 14 April 2011

Shareholders, exec pay and the fallacy of composition

I found a really interesting bit of commentary on executive pay in BlackRock's submission to the BIS short-termism review. Here it is:
Despite the shareholder input remuneration overall has continued to increase... One of the difficulties we face as investors is that we (rightly) assess a company’s arguments for pay changes or increases in light of that company’s circumstances. Generally, companies do present strong arguments for the changes they wish to make. But our assessment tends not to take into account the impact it will have on the trend overall. Collective engagement helps shareholders present a consistent view when there is one but different perspectives are as common in the area of pay as elsewhere in engagement. We also tend to look at structure rather than quantum, seeking an alignment with strategy and a structure that will incentivise the right behaviours. Thus, there are numerous practical obstacles to shareholder oversight of pay. We do not see the benefit in widening the scope of shareholders’ role in the process.
There are two things I would draw attention to here. First I think it's a very honest account of why shareholder engagement over remuneration might be ineffective. It is interesting in this regard that they say that therefore there isn't much point giving shareholders more of a role. Coupled with the commentary about the potential ineffectiveness of engagement, that (in my mind) seems to suggest alternative measures might be required - if it is felt that there is a problem.

Secondly I think the point about the company-specific nature of engagement is an important one too. It sort of looks like a fallacy of composition type argument to me - just because shareholders get what they want in terms of pay at individual companies doesn't mean that they get what they want in the market as a whole.

Interesting stuff...

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