Three things Cameron should do if he’s serious about high pay

That the prime minister had so much to say on the theme of excessive executive remuneration yesterday, both in his Daily Telegraph interview and on the Andrew Marr show, should be welcomed.

Many of Cameron’s proposals should be also be welcomed, but they will be insufficient solutions unless they are supplemented with other proposals that go beyond the usual analysis and the usual solutions, to challenge the misleading myths of excessive pay.

My first concern is that the Prime Minister may believe the myth that shareholders are able and willing to tackle “market failure” (as he correctly calls excessive pay). Cameron told Marr that “empowering shareholders” was the “key” solution.

It is true that shareholders do need to be sufficiently informed and empowered to hold companies to account (rather than given a retrospective , non-binding vote on remuneration, as is the case now), and that some shareholders are assertive about executive pay; but many others see their role as short-term ‘traders’ in shares rather than longer-term ‘owners’ of companies.

The vast majority of shares are held via investment management companies, who typically either do not vote on remuneration (or any other issue), or automatically vote in line with management recommendations.

Even the Investment Management Association warned (pdf) that:

There is concern amongst investment managers that there should not be unrealistic expectations about what they can achieve.

Interestingly, Cameron appeared to dismiss one suggestion by Marr which could prompt investors to take their responsibilities more seriously, namely that they should publish their votes on remuneration, so that the rest of us, whose savings they invest, could hold them accountable.

Cameron said that such information is already known, but the work of FairPensions and others clearly shows that this is not usually the case.

The second concern is that although the Prime Minister rightly refers to the mismatch between directors’ remuneration and that of their employees, his solutions appear not to recognise that the performance of companies depends on the performance of the whole workforce, rather than the myth that performance is all about the people in the boardroom.

Cameron was at best lukewarm about the suggestions by Marr that there should be employee representatives on remuneration committees and that companies should report the ratio between pay of directors and employees, relying on an easily-dismissed concern to reject the latter.

If the prime minister is serious about helping UK companies to perform well, he should recognise that pay-ratio reporting and the inclusion of normal employees on remuneration committees would help companies and their investors to consider whole-company performance.

Cameron should also note the Hutton Review’s point (pdf) that companies with lower pay differentials tend to have better-motivated staff – the idea that we have to choose between performance and fairness is a false one.

Such initiatives would also tend to address public concerns that not only are executive pay levels too high compared with company performance, but that the differentials between top pay and employee pay– regardless of company performance – have now reached obscene levels.

If Cameron is serious about responsibility at the top, he should have accepted these three important steps towards transparency and accountability:

1. Investors should should publish their votes on remuneration.

2. Employee representatives should be on remuneration committees

3. Companies should report the ratio between pay of directors and employees

See also:

• IDS gets that responsibility runs from bottom to top – why doesn’t the schools minister – Alex Hern, December 16th 2011

• Unless pay gaps are reduced, we’ll end up with Victorian levels of inequality – Shamik Das, November 22nd 2011

• ‘Workers are children, and if you don’t like high pay, move to Cuba’ – Alex Hern, November 22nd 2011

• High pay damages our economy – Duncan Exley, October 28th 2011

• As top pay soars, the 99% are left behind – Will Straw, October 28th 2011

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Cherrycat

An issue with allowing shareholders to set executive remuneration levels is that what constitutes ‘good’ performance from their perspective isn’t always what constitutes ‘good’ performance by employees, taxpayers or governments.

Many companies cite one of the reasons for using overseas tax havens as a need to please shareholders and boost their share price. But companies that were founded in the UK, built on decades and centuries of UK labour and custom, depriving the UK of much needed revenue at a time when many of their employees and customers are struggling with austerity may not be popular.

With regard to banks, how does one define how a bank has performed ‘well’ in the current climate? For example, if Lloyds Group makes a slightly less massive loss this year than last, is that really worthy of a multi-million pound bonus for the Chief Executive? One can argue that all UK banks owe their existence to public financing. According to the Bank of England, the exchequer, including support from the British taxpayer, provided more than £1trillion of public money to rescue banks from collapse. Through short-term loans, loan guarantees and quantitative easing the Bank of England helped to bolster bank’s balance sheets. Banks, even those such as Barclays and HSBC that did not receive a ‘direct’ bailout, therefore benefit from a promise that taxpayers will never let them fail, because it would be too damaging to the UK economy. Thus, even though it did not take any direct state help during the financial crisis, former Barclays boss, John Varley, had to acknowledge the crucial role played by the government in rescuing the City as a whole:‘Even those banks who did not take capital from governments clearly benefited (and continue to benefit) from these actions. We are grateful for them, and our behaviour should acknowledge that benefit ‘

So some might say it is UK taxpayers who should be having a say on bank bonuses and remuneration. At the very least we should have a direct say in that regard with RBS/NatWest, 84% owned by taxpayers.

The highly controversial takeover of Cadburys by Kraft, funded by that same 84% taxpayer owned RBS/NatWest, may have been viewed as a ‘good’ idea by shareholders of both companies and the bank who voted it through. But it was not necessarily a good thing for the UK business community or the workers at their Keynsham, Bristol site which closed, despite initial promises to the contrary.

The recent Virgin Money takeover of Northern Rock may have been deemed a ‘good’ performance by both shareholder boards. But taxpayers lost out to the tune of £400,000,000.
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http://www.leftfootforward.org/2012/01/vince-cable-executive-pay/ Cable fails to provide a stick or carrot in the fight against obscene pay | Left Foot Forward

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[...] Three things Cameron should do if he’s serious about high pay – Duncan Exley, January 9th [...]
http://www.leftfootforward.org/2012/01/the-markets-do-not-care-about-stephen-hester-rbs-bonus/ The markets don’t care about Hester’s bonus | Left Foot Forward

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