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

Excessive executive pay is bad for business, says Matthew Lynn. A lot more still needs to be done to curb the abuse.

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.

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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 thatdon'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 adecade ago and average pay stagnated. It is impossible to argue that FTSE companies are twice as well run asthey 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.

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.