Big shareholders must take a stand against ludicrous CEO pay packets

Groupon has been going for just over two years. The company is based on a fine idea – that buyers can group together to use the power of volume buying to get discounts, and that companies can advertise themselves by offering those discounts. It also has 83.1 million people signed up to give it a go (up from 200,000 two years ago) and 57,000 retailers and service providers who have already given it a go.

It all adds up to an extraordinary level of growth. Groupon is, says Forbes, ‘the fastest growing company ever”.

That’s nice. But does that really mean that it is worth $15bn or more? Does it really mean that it is, as it claims “better positioned than any company in history to reshape local commerce”?

I doubt it (it is heavily loss-making, and there’s already hordes of competition – I’ve never used Groupon but I do use its Glasgow-based equivalent every now and then). But doubt as I might, I’m prepared to be proven wrong about it – social media sales businesses of this kind are as much a mystery to me as to most other people.

However, looking at the way the business is run, there is one thing that is unmistakeably true: the founders of the business are a pretty immoral lot. According to Stephen Foley, writing in The Independent, the company has raised a total of $1.1bn. But they haven’t used it in the way that one expects start-up companies to use money. Instead they’ve paid much of it out to themselves: they have used “$942m of the proceeds to return cash to founding investors… and to directors.”

Chicago professor Eric Lefkofsky has already cleared $400m and founder Andrew Mason $28m. Groupon is also already paying dividends to its owner, something pretty much unheard of among loss-making companies.

Overall, says Foley, Groupon’s early investors have shown an impressive determination to grab large portions of the millions flowing through its doors, “irrespective of whether those revenues can certainly and sustainably be turned into profits”.
 
It is shocking stuff. But these days it shouldn’t sound unfamiliar. We are by now all too used to the managers of large companies paying themselves large amounts of money regardless of whether they are successful or not. A survey just out from MM&K shows that senior executives in the UK saw their pay rise by 32% last year. At a time when most people are struggling to make ends meet.

Why? It isn’t because big money is needed to attract good managers. 59% of CEOs of FTSE 100 companies were hired internally, and those hired internally tend to perform better than those hired externally. It can’t have been performance related, for the simple reason that the FTSE 100 rose only 9% or so over the same period. And it can’t have been because they deserved it for some other reason. Who really deserves more than £1m a year if they aren’t an astonishingly successful entrepreneur?

So it is probably down to the same old reasons, the talent myth – which I discuss here – and the ludicrous influence of remuneration committees and pay consultants. A few weeks ago Alex Brummer in the Mail pointed out that Bridget Macaskill, head of Prudential’s remuneration committee, seemed to think that she “had done her job by obliging chief executive Tidjane Thaim to take half his bonus in shares.” In fact she would have done her job if she had arranged for his pay package to be around a fifth of what it actually was – £8.4m.

Lisa Buckingham, also in the Mail, makes the point well. At root, she says, “remuneration plans are little more than a post hoc justification for paying the boss what they want. Parasitic pay consultants keep themselves in lucrative employment by spurious comparisons with other companies designed to achieve just one outcome – that the chief gets paid more than whoever is in charge of the closest rival”. That pretty much sums it up.
 
82% of people in the UK now think the pay gap is too wide. They also think – according to a report from the IPPR – that the average salary for a chief exec of a large national company should be about £350,000.

Unfortunately that’s unlikely to be the case any time soon. Current average salaries are about £1m and the top 1% of the workforce (concentrated in public companies) have more than doubled their share of the nation’s pay packet since 1975 (from 5% to 11%).

If current trends continue, the highest paid in the country (the top one thousandth) will be getting 14% of our income. That’s the same level as in 1900. The only way to stop this absurdity is for institutional shareholders to note that money paid to executives is money not paid to them and their clients and to do something about it.

Clearly the current investors in Groupon aren’t bothered about their money disappearing into executive pockets. But is it really too much to expect our home-grown fund managers – the ones in charge of our pensions and Isas – to vote against stupid pay packets on our behalf?