This time it’s different, say those battling to curb soaring boardroom pay. This time shareholders really are so fed up with egregious rewards for indifferent performance, or even stratospheric rewards for good performance, that a genuine reverse is coming.
Look at the revolts at recent annual meetings, they say. Almost 60 per cent of BP shareholders voted against the remuneration report in protest over Bob Dudley’s £14 million; 72 per cent of Weir Group investors voted against remuneration policy at the struggling pumps group.
Look at the stirrings at even the most cautious and passive of investment institutions. Norway’s sovereign wealth fund, the biggest in the world with $870 billion of assets, was reported this week to be planning to get off the fence on top pay and campaign against the worst culprits.
Doubtless Standard Chartered will be spanked at its AGM today over its bonuses, and Reckitt Benckiser tomorrow over the £23 million handed to Rakesh Kapoor.
We have been here before, not merely in the “shareholder spring” of 2012, since when board pay has risen as fast as ever, but for decades. I cringe at my naivety after the notorious British Gas AGM of 1995, which I described as a watershed moment. Four thousand people turned up to berate the board over the pay packet of Cedric Brown, its chief executive. Investors lined up to accuse him of unbridled greed and Sir Richard Giordano, the chairman, of hapless incompetence. A live pig was paraded outside just in case there was anyone who had not got the point.
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The fury and barracking went on for five hours. Some of it was union-orchestrated, but most was heartfelt and sincere. My fingers ached with notetaking. Surely, in future no board would risk putting itself through such a shameful ordeal ever again?
The object of all that anger was an annual pay packet of £475,000. Average pay for a FTSE chief is now £5 million. Mr Dudley at BP last year scooped in two weeks what Mr Brown was paid in a year, despite delivering a loss for shareholders; WPP’s Sir Martin Sorrell was paid as much every two and a half days.
The forces pushing up board pay are infinitely stronger than the forces curbing it and there’s no evidence that this about to change any time soon. Here are ten reasons why:
Scale and globalisation
Companies are getting bigger. Chief executive pay, even when in eight digits, is a mere rounding error for companies reporting profits in ten digits. Institutional shareholders, privately, don’t care very much.
The cult of the superhero leader
Headhunters, analysts, financial journalists and, of course, senior executives are all guilty of stoking the myth that a talented few are simply irreplaceable. New recruits can write their own pay terms.
Fear of looking hypocritical
Institutional shareholders are run by executives on precisely the same fabulously agreeable pay escalator. The head of M&G received £5.4 million last year, the head of Schroders £8.9 million.
Fear of looking stupid
Long-term bonus schemes are horribly complex. How many non-executives on board pay committees really understand the formula they are approving and the quantity of gold that could be spat out in five years’ time as a result?
Timidity and desire for cohesion
The non-executive director who questions executive pay can be seen as one of the awkward squad. It can’t have been much fun for Dame Alison Carnwath, former chairwoman of Barclays’ remuneration committee, when she suggested cutting Bob Diamond’s bonus to zero in 2011 and found herself in a minority of one. She then had the grotesque job of publicly defending his £6 million package when she had privately opposed it. She left a few months later.
Differentials
Senior but unexceptional accountants and lawyers have long since passed the £1 million mark. It doesn’t seem unreasonable that FTSE 100 bosses with far more responsibility should get more. As one remuneration committee chairman once put it to me, why should the chief executive get less than the hired help?
The figleaf of SRI
Every institution pays lip service to the mantra of socially responsible investing and has specialist SRI teams combing through everything from pay to pollution. It’s helpful PR, but these teams usually carry little weight internally, where the greater emphasis is on investment returns and being on good terms with investee companies.
The figleaf of shareholder resolutions
Voting against the remuneration report gives institutions the evidence to mollify the public that they are doing something, but the votes are non-binding. The latest distraction is the newly introduced requirement to approve remuneration policy. This is binding, but toothless and non-retrospective. A company may be required to redraft its written policy (in which motherhood and apple pie feature widely); that doesn’t automatically bring down pay.
Ratcheting and the lunacy of “above average pay”
Every company seems to insist it pays above-median rewards in order to secure and retain the best people. Individually, it may sound reasonable. Across the board, it is a mathematical impossibility and merely strengthens the upward-only pay ratchet.
The ever-growing reliance on pay consultants
This industry, likened to prostitution by Lord Lawson of Blaby, is at the heart of the pseudo-science that gives huge pay awards. When shareholders complained about share options, consultants came up with the bright idea of long-term investment plans, bonuses now seen as just as flawed and more costly.
Cupidity
A formidable force, and it ain’t about to be abolished.