How to put the spring back in the steps of shareholders

The shareholder revolts sparked off last year against excessive pay have all but fizzled out, says Matthew Lynn. It's time for the government to put its weight behind the movement.

For a brief moment, it looked as if something might have changed. Last year, as the days started to grow longer and the first blossoms appeared on the trees, the City was rocked by a series of revolts over runaway chief executive pay.

At companies ranging from Barclays to Trinity Mirror, Aviva and Astra Zeneca, chief executives were forced to trim the lavish pay packages they had awarded themselves. In some cases, they were actually kicked out.

The shareholder spring', as it came to be known, promised to end the racket that has seen pay for British chief executives soar out of control. But that has all fizzled out now and corporate pay is as much of a racket as it ever was.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

A year later, there is little question that pay is just as far out of line with performance as it has been for the last decade. The median pay of a FTSE 100 chief executive has risen by 266% to £3.2m since 2000, according to figures compiled by the consultants IDS. Over the same period, the wages of the average worker have risen by only 40%, to slightly more than £24,000.

And the shareholders the people who actually own these firms? They've done far worse. The FTSE is still not back to the levels it was at way back in 2000. And while dividends have risen faster than that, they have not kept pace with the rise in boardroom pay.

No one would seriously argue that FTSE companies are almost three times better run than they were a decade ago. So why are CEOs paid almost three times as much? In truth, CEO pay has become a form of market failure. A small group of people have been allowed to fleece their shareholders, awarding themselves ever higher rewards for consistently mediocre performance.

In theory, firms should be controlled by the shareholders. But ownership is now too diffuse for shareholders to be effective. And the fund managers, who control the shares, are often part of the same cosy insider club.

True, there are some signs of pay moderation. So far this year, according to Towers Watson, a consultancy, FTSE CEO pay is up by only 2.5%. A few groups, such as BAE Systems, Barclays and Lloyds, have frozen rewards for 2013. But there are few signs this spring will see anything like the same levels of revolts.

It isn't enough just to stop pay rising in most cases it needs to be cut. And without revolts, it will probably start soaring again next year. In fact, shareholders need some help from the government if they are to bring pay back under control. Legislation scheduled for later this year will make shareholder votes binding on boards. But a lot more could be done.

First, pension funds should be forced to consult their members on pay. The majority of shares are held via the big retirement funds. Right now, they can vote on pay policies much as they please. Why not force them to seek permission from their members? Why shouldn't pension fund-holders get a questionnaire every year asking their views? It's the same for unit-trust holders. Most ordinary people would vote against outrageous pay levels and the fund managers would have to act on that.

Next, a huge number of pension funds are directly controlled by the government. They could make it a policy to vote against the re-election of any CEO paid more than £2m a year unless an exceptional case could be made. Any firm paying more than that would know it was going to face opposition. It would only take a few votes from other shareholders for it to be overturned.

Third, the vote on pay should be taken at a separate meeting. At the moment, it is wrapped up in a dull-as-watching-paint-dry annual general meeting. Few shareholders attend, and not many of those that do want to sit through a presentation on the company's Belgium operations before they get to the meaty stuff. If the vote on pay was put into a separate meeting and even better held online it would be a lot easier to rally votes against excessive awards.

Finally, the bar could be lifted. Right now, any payment can be approved with the backing of a majority of shareholders. Why not require 60% approval for any pay package worth more than £2m not just the 50% that is needed now? That would make it a lot harder to muster the necessary support.

None of those changes in themselves would necessarily be enough to bring pay down to more realistic levels. But together they could start to make a real difference. There's nothing anti-business about curbing executive pay. Swiss campaigners won a referendum this year to limit corporate pay, yet Switzerland is one of the most pro-business economies in the world. Swiss companies aren't fleeing the country because of the new rules and they won't flee this one either.

Out-of-control pay for CEOs is damaging the economy and the free-market system. People see a small group of bosses making crazy sums for very little and conclude the whole system is rotten. And it prevents talent from emerging. If you can get paid loads for running a firm that's going nowhere, why find the talent that might get it growing? Shareholders won't achieve change by themselves we learned that last spring. They need legislative backing.

Matthew Lynn

Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years. 

He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.