UK politicians have waded into the debate over executive remuneration, but will big bosses be any poorer as a result? Unlikely

Executive pay is back in the headlines. Not that it ever really went away. The financial crisis sparked a general sense that it was time fat cats thought about dieting. That sentiment grew stronger in the post-crisis recession. And stronger still as directors’ pay spiralled ever upwards. The recent spat over the proposed bonus for Stephen Hester, chief executive of 84% part-nationalised bank RBS – which he eventually waived – is the highest profile example.

Enter the politicians. The UK opposition leader Ed Miliband has denounced the bonus culture. And the prime minister David Cameron himself has a plan. Like all good plans, it looks simple and sounds great.

First, let’s have more transparency. Directors must stop hiding behind 15-page remuneration reports and give us the top-line figure. Second, raise accountability: ie step up shareholders and start voting down these outrageous pay deals.

Transparency and accountability, the perfect concoction. Or is it? Remuneration experts are frankly doubtful. For starters, in the UK pay deals for FTSE leaders are already open to all. Politicians and journalists might prefer a single sum, but investors – those whose money these bosses are effectively pocketing – have always been fully cognisant of the sums at stake.

Risks and bonuses

Where a light needs to be shone is on the City. Beyond the most senior echelons of bank boardrooms, “no-one has got a clue what’s going on”, says Sarah Wilson, chief executive of proxy voting agency Manifest. More than 2,600 UK bankers walk home with more than £1m a year, she says. Not only does that make the payroll of a few high-profile fat cats seem like small change, but it also highlights precisely how the economic woes began: City traders taking ever bigger risks in pursuit of ever bigger bonuses.

And, of course if there is complete transparency on pay, everyone will want to be in the top quartile, which means there is a wired-in ratcheting-up effect.

But the most salient argument against Cameron’s proposals is that they’re not especially new. The 2002 directors’ remuneration report regulations already oblige all UK companies to report annually on senior executive pay deals (including a forward-looking statement) and to put those pay deals to a shareholder vote. Yet ten years on, executive rewards are still rising, says Tom Powdril from corporate governance consultancy PIRC. “If [Cameron’s proposal] is it, we’re in for more of the same,” he says.

PIRC joins others critics in calling for a more radical overhaul of the remuneration system. One suggestion gaining momentum is to appoint employees and shareholders to remuneration committees. Another is to require shareholders to disclose their voting patterns. Mandating such disclosure would, Powdril says, force shareholders to “up their game”. Research by PIRC indicates that on average fewer than one in 10 large asset managers votes against directors’ remuneration packages.

Sustainability advocates, meanwhile, are in two minds. On the one hand, the current debate is bringing welcome scrutiny to the link (or lack of one) between pay and performance. Current notions of performance focus squarely on the short term and the financial. But what of long-term sustainable success? And what of executives’ non-financial performance indicators? With the odd exception, neither gets a look in at bonus time. Could now be the time to change that?

On the flipside, all the talk of increased transparency points towards a simpler remuneration process in future; something that, regrettably, the addition of non-financial metrics seems to augur against.

In sum, expect more headlines. And many more seven-figure salaries.   



Related Reads

comments powered by Disqus