The executive pay racket is anti-business – it’s time for a clampdown

Every so often something unexpected, and actually quite good, happens. A Brit finally wins Wimbledon. Mobile phones all get the same charger. Cars use far less petrol. And, perhaps most unexpected of all, executive pay finally starts to come under some form of control.

After a decade during which the pay of FTSE chief executives spiralled out of control, the trend has now gone into reverse. Thanks in part to the so-called ‘shareholder spring’ of two years ago, when a series of big revolts were recorded against ludicrous packages, average CEO pay has now been falling for two years in a row.

The trouble is, it still has a long way to go if it is to come back down to reasonable levels. Shareholders have made a good start. But they need to do three things to keep the pressure up.

Reward the companies that are cutting pay. Use the positive examples to create peer-group pressure on others to do the same. And make sure the companies that don’t reduce boardroom pay face even fiercer sanctions.

For much of the last decade, the simplest way to make yourself very wealthy was not to start a company, as it used to be, or even to become a star trader in the City, both of which required some measure of skill and risk.

Instead, the best thing to do was to join a big, well-established company, preferably with some form of monopoly, then steadily climb your way up to the boardroom, mainly by mouthing corporate platitudes. With little effort, you would make millions.

The average FTSE chief executive now makes £4.3m a year, a rate that has gone up 73% over the last decade. That is roughly £1,100 an hour, meaning they made as much in a couple of days as the average worker makes in a year.

And yet, over the decade when CEO pay went up by 73%, the FTSE hardly moved – it is still no higher than it was a decade ago – and average pay stagnated. It is impossible to argue that FTSE companies are twice as well run as they were a decade ago, or the bosses twice as important as the workers.

In fact, executive pay has become a kind of racket, with a small club of non-executives voting for huge pay rises for each other.

But now there are signs that it is finally coming to a stop. According to a report from the proxy advisory service Manifest and the consultants MM&K, FTSE CEO pay has now been falling for two years in a row. It was down 7% in 2013 after falling 5% in 2012.

Admittedly, the figures are complex, because there are bonus schemes, and deferred tranches of pay to come, which means compensation might go up in future years. But at least basic pay is starting to become more moderate, and is actually coming down.

Even so, much more needs to be done. Given that CEOs were well paid a decade ago, basic pay needs to fall by 30% or more to get back to reasonable levels. After all, with very rare exceptions, most CEOs of big companies have very few unique skills – they are largely interchangeable with one another.

A million or so a year is more than adequate to find someone competent to do the job. Shareholders need to keep on pressing for more substantial cuts. How? Here are three good places to start.

First, reward the companies that are cutting pay by naming and praising. Companies such as Barclays and Shell have cut their CEOs’ pay. In some cases, such as Barclays, that might be because the last CEO departed controversially. In others, pay may be coming down from a ridiculously high level. Still, there is no point in being churlish about it.

Shareholders need to recognise the companies that have moved in the right direction, and applaud them for their efforts. Where possible, buy the shares, and move the share price higher – very often, companies run by CEOs with more modest egos will do better over the medium term than the rock stars they have replaced.

Next, use those positive examples to create peer-group pressure on others to do the same. There are still some outrageous examples of overpaying CEOs. Sir Martin Sorrell seems to collect a few more tens of millions every year for running WPP, even though the performance of the business is hardly spectacular anymore.

If a company of the complexity of Shell can cut its CEO pay, it is hard to understand why WPP and others cannot dothe same.

Finally, if companies don’t reduce pay, then make sure they face even fiercer sanctions as a result. Legal changes, such as making companies publish a single figure for total pay, have helped. But it is possible to go further still.

Why not use the power of the state’s own funds? Local authority pension schemes have billions tied up in the British stock market. They should pressure boards to pay less.

Excessive pay is not a right-left issue. There is nothing pro-business about letting a small group of CEOs take far larger rewards than their shareholders or staff. If anything, it is the executive pay racket that is anti-business. A lot more still needs to be done.

  • Pinkers Post

    In an article for Pinkers Post’s ‘Port for Thought’ on 25 April 2014 entitled ‘Why CEOs should be paid less’, Antonia Oprita of marketmoving.info summarises:

    “Sure, CEOs can keep telling themselves that they are worth the huge sums they receive. Some may even believe it. But the truth is, most of them are not. And the sooner shareholders realise this, the better.”

    Pinkers agrees. There are, however, a few exceptions… Entry 29 June, pls scroll down: ‘Agitated Activists?’: http://pinkerspost.com/post.php

  • Robert Cattell

    Only a company’s shareholders can fix this problem – the trouble is larger shareholdings are often owned by holding companies whose executives are themselves on vast salaries.

    The Treasury could help by making employer’s NI sharply progressive – if companies can afford to pay their executives huge sums they could also afford to pay huge sums to the NHS – I’m sure doubling the cost to a company of its executives’ pay would help concentrate shareholders’ minds!

Merryn

Claim 12 issues of MoneyWeek (plus much more) for just £12!

Let MoneyWeek show you how to profit, whatever the outcome of the upcoming general election.

Start your no-obligation trial today and get up to speed on:

  • The latest shifts in the economy…
  • The ongoing Brexit negotiations…
  • The new tax rules…
  • Trump’s protectionist policies…

Plus lots more.

We’ll show you what it all means for your money.

Plus, the moment you begin your trial, we’ll rush you over THREE free investment reports:

‘How to escape the most hated tax in Britain’: Inheritance tax hits many unsuspecting families. Our report tells how to pass on up to £2m of your money to your family without the taxman getting a look in.

‘How to profit from a Trump presidency’: The election of Donald Trump was a watershed moment for the US economy. This report details the sectors our analysts think will boom from Trump’s premiership, and gives specific investments you can buy to profit.

‘Best shares to watch in 2017’: Includes the transcript from our roundtable panel of investment professionals – and 12 tips they’re currently tipping. The report also analyses key assets, including property, oil and the countries whose stock markets currently offer the most value.