CBI and Barclays still ensnared by the delusion of performance-related pay
By Ian Fraser
Date: April 27th, 2012
The debate over executive pay is turning ugly. In the UK, investor disquiet about the unwarranted rewards routinely doled out to bankers despite weak and unethically achieved performance is reaching boiling point. It could well explode at the Barclays AGM in London’s Royal Festival Hall which kicks off later today.
Barclays paid out three times as much in bonuses as it did in dividends last year and, despite woeful share price performance, despite trading at half its book price, despite swindling millions of customers by selling them useless PPI insurance policies and despite what seems to be questionable ethics, the bank still wants to give its chief executive Bob Diamond massive rewards.
As I said in a recent blog post, investors are particularly incensed by the bank’s decision to pick up his £5.7m tax bill under a tax equalization agreement, and it seems they won’t be placated by minor tweaks to performance criteria or half-hearted apologies from the bank’s chairman Marcus Agius (some investors may be mollified by the 22% hike in first-quarter pre-tax profits to £2.4bn announced yesterday but we shall see).
Two weeks ago, 55% of investors in US bank Citigroup voted against a $14.8m payout for chief executive Vikram Pandit. This could encourage investors in UK banks to finally discover some backbone.
Maybe, just maybe, after decades of somnambulance and serving their end-investors ill, fund managers have finally woken up to the fact that a cadre of self-serving banking and corporate executives have been lining their pockets at their expense, and at the expense of other stakeholders, for years. As John Plender wrote in a recent Financial Times op-ed piece:
“The fact remains that bankers’ pay is one of history’s great heists – a gigantic reward for failure.”
In the UK and US inequality has increased sharply over the past three decades, and super-soaraway executive pay has been largely to blame. A report by the High Pay Commission last November showed that the CEOs of FTSE 100 companies saw their earnings rise by 49% in 2010, while the average pay of ordinary workers rose by just 3%. The HPC said the average FTSE100 boss earned £4.2m in 2010, 145 times the average pay of their employees and 162 times the British average wage.
Last year, the UK’s coalition government decided the time had come to try and stop the runaway greed-fuelled express — whose engine and wheels have traditionally been oiled by self-serving, crony-capitalist remuneration committees (where mutual backscratching is the order of the day), oleaginous remuneration consultants and comatose investors — in its tracks.
Business secretary Vince Cable proposed eminently sensible proposals that would give shareholders a binding vote on pay — as opposed to their current ‘advisory’ votes — and the ability to claw back rewards in the event of corporate performance targets being missed or other failures (including ethical ‘lapses’ such as wantonly ripping millions of customers off).
The government’s Department for Business Innovation & Skills also said it wanted to make executive pay more transparent and break up the cliquey and self-serving system of remuneration committees. The government also said it wants to see greater openness about the role of remuneration consultants.
Management Today columnist Simon Caulkin welcomed BIS’s proposals, saying they:
“constitute the biggest shakeup of pay reporting and setting for decades … companies will have to explain the performance criteria for executive bonuses – currently shrouded in mystery – and make clear to what extent and effect they have consulted with employees.”
True to form, the neoliberal employers’ organisation the CBI is aghast. In a response to the government’s consultation exercise published today, the CBI sought to rubbish large aspects of the government’s proposals. It accused the government of confusing the roles of shareholders and management. Its policy director Katja Hall said:
“The government’s proposals unhelpfully confuse the roles of shareholders and management. If these responsibilities are blurred then the result would be shareholders micro-managing companies, which would lead to slower and less effective decision-making.”
She disputed the much quoted Incomes Data Services’ figures on the average increases in CEO pay, adding:
“We absolutely do not accept the myth of a ‘cosy club’ of business leaders setting pay for each other. The evidence shows that no two FTSE 100 executive directors sit on each other’s remuneration committees.”
She was dismissive of the government’s proposal for the introduction of a higher threshold for passing votes on pay issues. She said:
“The government’s proposals for a higher voting threshold leave companies at the mercy of activist minorities, or result in pay policy going against the wishes of the majority of shareholders. They would also apply a higher standard of control to pay than is placed on the buying and selling of the company which would be completely disproportionate.”
Katja Hall concluded (emphasis is mine):
“Reforms on executive pay should focus on greater transparency, stronger links to performance, bolstering the role of remuneration committees, and giving shareholders the right information and powers to hold Boards to account.”
I’m afraid the dear old CBI, still living in a Friedman-ite universe, has entirely missed the point.
The biggest problem with corporate pay, as the Bank of England’s Andy Haldane explained in his excellent Wincott Memorial Lecture last October, is that tying pay to performance has been shown to distort executive behaviour, encourage reckless risk-taking and in many cases encourage executives to pursue self-destructive course. In Management Today Caulkin said that researchers have been pointing out for years that performance-related pay is:
“a snare and a delusion, because the reasons for high performance can neither be isolated nor realistically linked to actions the CEO should be taking.”
So why exactly is the CBI endorsing it, I wonder?
This article was first published on QFINANCE on April 27th, 2012
Further reading on reforming corporate governance and reining in executive pay
- City analyst: Barclays’ approach to paying Diamond is “just laughable” By Ian Fraser
- Robert Jenkins: Britain’s banks must kick their RoE habit by Ian Fraser
- Andy Haldane’s proposals for breaking the bankers’ doom loop By Ian Fraser
- Corporate governance reform: Cable means business by Ian Fraser
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