I love the bonus cap debate

There's a lot of comment in the press today about continuing attempts in the EU to put a cap on variable pay for bankers. Judging by some of the views expressed, this proposal is clearly driving some people nuts. Great.

Before I get into that consider what the core proposal is - that bankers can earn only 100% of salary in variable reward. This is considerably more than almost the entire working population can expect, most of whom are offered no bonus, and that level of variable pay would not have been ungenerous even for company director until relatively recently. So, essentially, opponents of a cap are arguing that the current fixed/variable split is the correct one (and implicitly they suggest that current pay is at a 'natural' level to which it will return whatever reform is enacted). I would add in passing that there is no evidence provided, as far as I am aware, as to why a ratio greater than 1:1 is required in terms of motivation.

As I've written before, there's a really dishonest argument about a bonus cap which is that it would 'drive up' base pay. Except it wouldn't, the banks would 'drive up' base pay - if they chose to - no-one is forcing them to. If the banks do decide to increase base salaries to compensate people, who are extremely highly paid, for a loss in variable pay let them justify that to their shareholders and other stakeholders - it will be their responsibility. Anyone who argues that a cap will "cause" base salaries to rise or "drive" them up is, unwittingly or otherwise, obscuring the fact that banks decide whether this will happen or not.

Pushing this on a bit, one of the reasons I really don't like large variable pay is that it obscures increases in overall reward that might be challenged if expressed in comparable increases in base pay. In reality most incentive schemes pay out something most of the time, which is why bankers come to expect their bonuses. So variable pay isn't actually that variable. But because it's notionally 'at risk' shareholders and others are willing to tolerate a lot more than they would with base pay.

Therefore, a greater emphasis on base pay would make increases in overall reward a lot more obvious, and therefore open to greater challenge. I do wonder if that is one of the reasons that banks and their hired liars hate this idea so much. After all, unless you consider that they love risk so much that they would rather have a greater proportion of their pay at risk, why would bankers complain about having a more reliable income?

Another argument put forward by the industry's shills is that restructuring remuneration in this way would make them less 'flexible'. Well, maybe. Of course banks would still have the ability to cut staff costs by a maximum of 50% through pay structure alone. But they could also learn from experience elsewhere in the private sector, or indeed the public sector. In addition to paying zero bonuses they could freeze base pay entirely, or even cut it. If the cost pressures they face are still too great they could even cut staffing levels. This is what lots of other employers have to do. And, again, if banks didn't seek to push up salaries in response to the cap they could face lower overall wage costs - it's their choice.

A final argument I find really odd has come from the CBI which says that a cap would "take the power to hold companies to account out of investors’ hands, by removing tools such as voting on pay policy and implementation"  This is simply nonsense as far as I can see. No-one is suggesting that shareholders would lose their existing powers on pay where they exist, as in the UK. If the point is that pay policy will be affected by this policy before shareholders get a say on it then that's true, but nothing new. After all, the FSA remuneration code already does this.

I think the CBI's real concern is buried elsewhere in their comments today: "We are concerned that this could be the thin end of the wedge, with Europe trying to expand this legislation to apply to businesses more generally, which could damage stability and growth."

Yep, and the rest. If you only need a 1:1 ratio for bankers, why do we need a higher ratio in other companies? This pulls you back to the questions like why we ever let (not so) variable pay become such a big chunk of the total, and what evidence there is for it being necessary. These are questions that I doubt the CBI wants opened up again, it would rather everyone kept the focus on 'performance linkage' rather than scale of pay.  

So overall I think the bonus cap proposal is actually very helpful. The nonsense it provokes from opponents shows that the current structure of pay in the banking industry and elsewhere is far more open to challenge than we might imagine. The fact that the most powerful and well-financed lobbyists think this is worth expending reputational capital on (why is the CBI sticking up for bankers' bonuses???) may tell us quite a lot.

Gifts, time and financial power

Most of us are overwhelmed with the worries arising from our daily relations with bosses, workmates or clients, and most of us take those worries with us, in our laptops and mobile phones, wherever we go - to our homes, for weekend strolls, in holiday hotels: we are never further thane a phone call or a phone message from the office, constantly at people's beck and call. Connected perpetually to the office network as we are, we have no excuse for not using Saturday and Sunday to work on e report or the project to be ready for Monday morning. 'Office closing time' never arrives. The once sacrosanct borderlines separating home from office, work time from so-called 'free time' or 'leisure time', have all but been effaced, and so each and every moment of life becomes a choice - a grave choice, a painful and often seminal choice, a choice between career and moral obligations, work duties and the demands of all those people needing our time, compassion, care, help and succour.

Obviously, consumer markets won't resolve those dilemmas for us, let alone chase them away or render them null and void; and we don't expect them to give us any of those services. But they can, and are eager to help us mitigate, even to quash the pangs of guilty conscience. They do it through the precious, exciting gifts on offer, which you can spy out in shops or on the Internet, buy and use to make some of those people who are hungry for your love smile and rejoice - if only for a brief moment. We are trained to expect the gifts supplied by shops to compensate those people for all those face-to-face, hand-in-hand hours we should have offered them but didn't. The more expensive the gifts are, the greater the compensation the giver expects them to offer their recipients, and consequently the stronger is their placating and tranquillizing impact on the giver's own pangs of conscience. 

Shopping thereby becomes a sort of moral act... Emptying your wallet or debuting your credit card takes the place of self-abandonment and self-sacrifice that moral responsibility for the Other requires. 

Zygmunt Bauman, Collateral Damage.

I think the above excerpt is very insightful, so I thought I'd quote it in full and add a few brief further thoughts on the same subject.

I think the idea that gifts are often compensation for not being around, or contributing enough, is quite true, along with the suggestion that giving a bigger gift can make us feel better. Incurring some financial 'pain' feels like we've made a sacrifice.

And yet there are some complicating factors that make me think this isn't the whole story. For one, what about the difference between cost and thoughtfulness? We can all think of occasions when a well chosen gift has meant a lot more than a more expensive one. I think that is at least in part because the recipient values the sacrifice of time/effort involved in thinking about what they would like and tracking it down. So gifts which have involved some sacrifice of time/effort can have more emotional firepower than those that cost us only financially.

Linked to this I reckon that fungibility is a negative when we think about the value of a gift. At the extreme, when we give people money as a gift aren't we often implicitly saying "you're too difficult to buy a present for" or "I don't know you well enough (anymore?) to know what to get you"? Giving vouchers is a really interesting mid-way point as we're kind of saying "I don't know what you would like but I think you'd like to get it from This Kind of Shop."

Finally, I think relying on expensiveness can backfire, socially speaking. Whilst giving a very expensive gift might be meant as an expression of financial self-sacrifice, it may be seen by the recipient as an assertion of financial power. the message that may be conveyed (whether intended or not) is not "look at the financial pain I was willing to endure" but "look at the financial pain I am able to endure". The emphasis may be read as being on the giver's financial capacity, not their willingness to sacrifice it.

One of the things going on, then, is that people are communicating in different ways through gifts. And, again, to rely on scale of expense could be seen as implicitly asserting that money trumps other concerns.

PS - should stress that obviously Bauman isn't trying to describe all the elements of gift-giving, just thought a couple of other points were worth making.

Labour on takeovers etc

There was a tiny sliver of corp gov related policy in Ed's speech on the economy this week.

We will stop takeovers that are waved through on the votes of speculators and hedge funds who flood in to buy shares once a takeover bid has been announced. Because when that happens it can destroy great British companies and the good jobs that go with them.

That sounds like an argument for something like a qualifying period to me. Iain Martin on the Telegraph (who was the first politico commentator to assert 'Ed actually isn't useless') doesn't like the idea, and his blog on this is worth a read.

I don't agree that it would be difficult to enact, it would take a change to company law, but it could be done, as the Takeover Panel concluded -

the Code Committee understands that qualifying periods (or weighted voting rights) could be introduced through changes in company law. If such changes were to be made, the Code Committee considers that it would be logically consistent for the Code to be amended accordingly. In the absence of such changes, the Code Committee does not believe that the Code should be so amended.

The real question is whether it is worth doing. It will certainly prevent some people who will almost certainly vote FOR deals to go through (because they expect an uplift) from doing so. However that may not be enough to stop a lot of deals given how easily they pass. In order to really 'throw sand in the wheels' of M&A activity you would probably want to raise the voting threshold too. I think Labour proposed this latter policy in the 2010 manifesto, with the aim of raising it to a two-thirds majority I think? Would probably be more consistent with other votes to raise it to 75%. (PS - the Takeover Panel also looked at raising the threshold and again said it's doable via company law but that no-one wants it to happen.)

Those two policies combined would send a significant message about Labour's attitude towards MnA activity. It would be very unpopular with the City. I think business would be more ambivalent - some directors definitely think the takeover regime is too liberal (at one point the IoD backed a higher threshold for instance), others don't see the problem. I reckon the CBI would be opposed though.

So the political judgment is whether this is worth the fight.

The same is question arises in respect of the idea of putting employees on remuneration committees. As I've written a lot, I like this policy and I think it could be put into force without too much technical trouble, but again the question is whether it is worth the fight. I'm now of the view that, since there will be a scrap over this, Labour might as well at least try and go further - ie advocate employee directors - rather than spill blood over a relatively small shift in the membership of rem comms.

I'm no strategist, and the relative silence of the Labour frontbench (as contrasted with left-of-centre think tanks etc) on corporate governance reform might suggest that there is some nervousness about this stuff. Obviously no-one wants to be characterised as being anti-business, or adopting an old school approach to these issues.

However, I would make a couple of small points in support of Labour being ambitious. First, I genuinely think the 1990s version of corporate governance is becoming hollowed out, as we've had 20 years to try and make it work. For example, I note that the main argument that the Takeover Panel used (or said respondents used) against qualifying periods  was that it breached the 'one share, one vote' principle. Well, it is just a principle, and people like Bob Monks and Simon Wong have openly questioned whether it is necessarily always a good one, in corp gov terms. I don't think anyone can make a strong case, now, against reforming voting MnA solely by reference to the sacred 'one share, one vote' principle. It's kind of reduced to saying "we can't have that type of policy because we believe we mustn't."

Similarly the idea of employees on rem comms is currently mind-boggling for many people brought up on 1990s vintage corp gov. But again we've had a pretty good crack at trying to make shareholder empowerment plus company disclosure work. Again, opposition to employee reps generally makes reference to a certain type of corporate governance ideology - accountability should be to shareholders, employees wouldn't be 'independent etc - there's not a big legal or financial barrier (though we probably would want to look at company law). I think arguments that we only need more shareholder empowerment and more disclosure, because that's 'the system' we have and employee representation would be heretical in that system, seem pretty weak and, as such, will be easier to overcome now than in the past. In fact overall the whole 1990s corp gov consensus feels pretty flimsy to me now.

Second, as I suggested in my post about co-determination, it would be a mistake for Labour to over-estimate the attachment that shareholders (principally asset managers) have to their 'ownership' role. Many asset managers still don't really buy that 'stewardship' has a (financial) value, though they will go through the motions a bit. I think that, provided that the role and financial interest of shareholders is protected (and why wouldn't it be?), there may be less serious opposition to employee representation, than we might expect. I have no doubt that the CBI will make noise about the shift away from shareholder primacy (though I think the IoD might possibly develop a different view) and I suspect they can get some people in the investment world to parrot their lines. But I wonder whether the investment industry as a whole (ie not just the corp gov microcosm) will really want a big fight over this, particularly when what we are really talking about is who gets to go to which meeting, not whether or not shareholders still get votes/dividends/whatever.

If we want to see a big shift in corp gov I think what we need to do, and pretty quickly, is to start talking about these ideas with those we need to win over. Largely to try and get them onboard but also, and presuming that many won't shift, to gauge the breadth an depth of potential opposition. 

Voter support for employee directors

Just spotted this, excerpt below:

Trade union campaigners say there is now widespread public support for the idea of ‘worker directors’ in UK boardrooms, with even a sizeable majority of Conservative voters backing such a move.
A poll by Survation for the Unions21 think-tank found 76% of UK employees and 89% of trade union members are in favour of workforce representatives sitting on company boards of directors.
Labour voters were most strongly in favour, with 85% in support, followed by Liberal Democrat voters with 81% and Conservative voters with 70%.
More than half of all respondents (53%) said they would support 10% or 20% of seats on company boards being reserved by law for workforce representatives.
Only 7% of employees were opposed to legally reserving any seats for workforce representatives.
Campaigners say the figures reflect growing popular demands for greater corporate accountability in the wake of the banking crisis.

What can shareholders 'own'?

A couple of excerpts below from Governing the Firm: Workers' Control in Theory and Practice which is in a section titled 'Why firms cannot be owned'.

In a society where slavery and indentured servitude are not legally enforceable, no-one can own a firm because a firm is a set of human agents. It is of course possible for someone to own an asset used by a firm, to own a claim on the net income from the firm's activities, to control the allocation of resources trough the firm's governance structure, or even to own a controlling position within this governance structure. But the human beings constituting a firm cannot be bought and sold.
.....
As everyday common sense suggests, firms are organisations consisting of people. The firm called General Motors includes employees of GM. There is an ultimate control group for GM - namely, its shareholders. But when someone buys a share (or even a majority of shares) in GM on the stockmarket, they are not "buying the firm." Rather they are buying a role or position in the firm, the role of being a GM shareholder. This role is defined by a bundle of rights including the right to receive dividends, the right to a share of GM's assets if they are liquidated, and the right to vote at shareholder meetings. Such roles can most certainly be treated as commodities and passed from one person to another. But the firm is not bought or sold in the process, because it is larger than its shareholders. 

Obviously these points are made in the context of a book advocating an increase in employee control of firms, but they seem pretty sound to me.

It also points up the reason why shareholders, particularly of companies that rely heavily on skilled employees, ought to be concerned about (hate the term) 'human capital'. Arguably the only evidence we see of this is in the banking sector where some shareholders have pushed for banks to keep up pay levels and hang onto key staff even if they bear some responsibility for poor behaviour. But maybe the fact that it's an exceptional case demonstrates that asset managers only rely grasp the importance of human capital in their own backyard. But if companies lose their skilled employees (perhaps in no small part due to a change in 'ownership') then the real firm is reduced even if the thing that shareholders own - control rights over the firm - is unchanged. 

Put employees on remuneration committees

I blogged previously about the fact that the bit of the UK Corporate Governance Code that is supposed to nudge companies to take account of how their own employees are doing when setting directors' pay doesn't really work.

I also mentioned the Unite commentary around the Greencore AGM. Note here that we have a case of a company cutting some employees' pay, and provoking a strike in the process. Yet it also paid out significant incentive awards to its directors. (Before anyone claims they may have been contractually obliged to make such payments, it's worth stating that the language in most contracts is very vague on bonus and incentive schemes. In addition, why has any company drafted contracts that might oblige it to breach the spirit of the Code?).

For info, at Greencore's AGM, the vote against the remuneration policy was tiny, below even the average level of opposition (resolution 5 here). So presumably shareholders felt that everything that was ok with the reumeration policy at the company.

Regardless of whether one thinks this is the right outcome, let's just think about why it's unlikely that shareholders would ever hold a company accountable if it looked like it was being 'insensitive' to pay and conditions across the group.

Well for one they may simply not know. In my experience most institutional shareholders pay very little attention to what goes on within the workforce of companies in which they invest, unless something very dramatic has happened. I suspect most Greencore shareholders wouldn't even know about the industrial dispute, and therefore it wouldn't form part of their analysis of the remuneration policy even if they decided they wanted to take account of such issues.

They may also not be interested. Again I think this is probably the default approach of most institutions. I don't mean that as a critical judgment, rather I think that they probably consider being a bit 'insensitive' is a pretty trivial offence in remuneration terms. For example, even Lonmin, which saw numerous striking employees shot dead in a violent strike last year, only got a 29% vote against its remuneration report at the following AGM (the interim CEO received an extra payment). It does make you wonder how bad pay and conditions have to be in order for a defeat to be inflicted!

Thirdly, they may consider that in a tussle between management and labour they would rather side with the former. Again, it's amazing how much institutions will put up with and how loyal they will be to an investee company management. Add to this that asset managers are more likely to have a view of the world that sees labour primarily as a cost, quite aside from any personal politics, and I reckon it's pretty clear where sympathies will lie most of the time.

As such, I find it very difficult to believe that shareholders can really do the job expected of them in respect of this bit of the Code, and I think companies routinely only play lip service to it.

However, think about that Greencore example again. What if the remuneration committee had included two employee representatives? I think it is much more likely that there would have been pressure to take account of what was going in the workforce, and therefore to restrain rewards for executives. It might only be a weak restraining force, but surely more than we have at present. If we want that bit of the Code to mean anything, there has to be a feed in taking account of worforce issues, and employee representation is by far the easiest way of doing it. 

Opponents of co-determination

Following on from my previous post, one of the things I'm reading currently is this book (PDF) about employee control within firms. What I'm most interested in is where opposition is to employee empowerment is likely to come from and how it it can be overcome.

In light of this, there's an interesting section on co-determination in Germany. What I found striking about this is that most of the opposition to co-determination came principally from employers and their associations (no surprise I guess), not shareholders. Here's a quote from another book featured in this section:

"The main challengers of the law were not shareholders, but companies and employers' associations made up of company executives... the main issue in the entire proceeding was not whether co-determination would dilute shareholder value, but whether it interfered with the interests of the corporation and how it was managed"

One could read a couple of things into this. First, it's an implicit acknowledgment that managers hold power in companies, not shareholders, and thus it is they who are most challenged by employee empowerment. Second, shareholders were not that bothered about ceding formal control provided that their financial interests were not damaged. Both perspectives don't really put much weight on accountability to shareholders, now such an unchallengeable and self-evidently 'good thing' in the UK corp gov microcosm.

It also suggests, to me, that for all the noise about how great our system is, and how important shareholder accountability is, if it came to a formal struggle over control rights many shareholders might not put up much of a fight. If you think about how little demand there has been from the mainstream for further shareholder rights perhaps this is another indication of the lack of desire for control. I'm also reminded of how often we hear the 'We don't want to micromanage' refrain from some investors.

What might be different in a discussion of workplace democracy in the UK now is that I suspect the business lobby would use their notional existing accountability to shareholders, as evidenced by things like the Stewardship Code, as a theoretical defence of their resistance to greater employee voice.