Monday 5 September 2016

For short-termism in pay and against shareholder empowerment

Everyone knows we should tie executive remuneration to long-term metrics and give shareholders more powers to oversee pay policies, right?

Yeah, except that if we make execs wait for rewards they sharply discount them (if some really put much value on them at all) so we have to pay even more money, so says this guy. I would go further, the implicit psychological model in incentive schemes is behaviourism. If you want more of Behaviour X - profits, share price appreciation whatever - you need to reinforce that behaviour to encourage execs to repeat it, and incentives are the reinforcer. Only, behaviourists seem to think that for it to work effectively you need to apply the reinforcer close to the behaviour you want to be repeated. Making awards literally years after the behaviour that is being rewarded this seems to fall way short. So actually long-term incentive schemes face two big challenges on their own terms, even ignoring the intrinsic/extrinsic motivation debate.

OK, but we all agree that greater shareholder powers to tackle pay are a good idea, right? Well, no actually. What the ICSA say here is spot on - we've tried tooling up shareholders several times in the past 15 years or so. But most shareholders don't really seem that arsed about using them to challenge companies. So why would we expect another round of the same thing to deliver any different results?

“Since 2002 the UK has been pursuing a regulatory approach based on a combination of transparency and voting rights. Despite both elements of the approach having being strengthened since then, it has done little or nothing to prevent an escalation of directors’ fees and bonuses.
“The issue is not that shareholders lack the rights that would enable them to hold companies properly to account, but that they are often reluctant to use them. Looking at the five largest shareholder revolts this AGM season, it is striking that the average vote against the report was 54 per cent but the average vote against the chair of the remuneration committee was less than 1.5 per cent. Unless investors become more willing to use the powers they already have, it may be necessary to consider different – and possibly more radical – reforms.”  

I've said it before, but there isn't any road left for the 1990s vintage corporate governance model. This means both abandoning the fool's errand of redesigning exec incentive schemes, and accepting the reality that most shareholders (asset managers in the main) think most exec pay schemes are OK most of the time - so giving them even more powers won't make any difference. Genuinely new thinking is required.   

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