Merryn's Blog

Shareholders are finally starting to get it on executive pay

More and more shareholders are coming round to the idea that CEOs are stupendously overpaid, and not as talented as they think they are.

There's a very important story on the front of the FT today. It isn't anything about Europe; it isn't anything about US unemployment; and it isn't about anyone's deficits. It is about pay: "Investors rebuke Citi board over pay".

The piece tells the story of how 55% of the shareholders of Citibank voted against the bank's plans to pay its CEO tens of millions of dollars in compensation for no obvious reason.

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Shareholders appear finally - to agree that Vikram Pandit and his fellow directors are grotesquely overpaid; that the targets they have to meet to get their money are so low as to be "ludicrous"; and that the company should no longer be allowed to get away with its usual nonsense combination of poor stock price performance, low dividends and sky-high executive pay.

Further good news comes in the fact that they aren't alone. Barclays shareholders (to the apparent amazement of its chairman) have also been complaining this time about an extraordinary decision to spend £5.7m on "tax equalisation" for the increasingly trying Bob Diamond, to say nothing of the fact that he is pocketing a £17.7m pay package despite a 70% collapse in the company's share price in the last 5 years.

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Better still, it looks like this might be just the beginning of the shareholder action we are beginning to see. F&C Investments is finally taking things seriously too it says it is contacting 50 banks to warn them that current levels of pay "are not sustainable".

And a study from the Share Centre has found that 95% of institutional investors think that pay across all big companies not just the banks is too high. Given that the average FTSE 350 director saw his pay rise by 108% between 2000 and 2010, I think we'd probably all agree, not least because, as the FT points out, the main driver behind the rises came from incentive plans that are both very easy for management to game, and so complicated that most of us haven't a hope of understanding them.

The boards of the big banks are, as Magareta Pagano points out in the Independent on Sunday, still trotting out their usual chestnuts about how bumper/obscene salaries are necessary because without them geniuses such as Diamond will "up sticks and leave". Pagano doesn't buy this. And as regular readers will know, we don't either. It is nothing but a "cheap form of blackmail".

Not only are there bound to be many talented bankers a rung or two down the ladder, but as a report in the Telegraph noted earlier this week, "the market in chief executives is smaller and less global than is sometimes imagined".

The general idea among those recruiting CEOs has long been that there is a global talent pool in which there are a few very talented people. These people with their rare abilities - "roving guns for hire" - will gravitate to where they will be best paid. That means that if you want the best CEO, you need to fully participate in the pay wars and you need to win by paying more than anyone else.

This is, of course, all nonsense, partly because it relies on the myth of talent (see here for more) and partly because, as Stephen Overell says, the majority of chief executives don't arrive via a market. They emerge from inside their organisations. They are company men with "context specific skills." That's why 77% of UK FTSE 250 CEOs are UK nationals. It is why in 2008 86% of US firms were run by US nationals (no global market here!). It is also why in 2002 65% of CEOs in the UK rose to the top via their own company's talent pipeline.

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There is also evidence to suggest that the performance of these internals was better than that of those brought in from outside: a study of FTSE 150 chief executive transitions from 2004 to 2008 (by Spencer Stuart) showed that those involving internal appointments were "the more consistent performers", while it seems true that the bosses of the most visionary firms ("think Apple") are "almost without exception internals".

So there you go. There is no global market for CEOs. There is no excuse for overly high pay (note that even if there was a global market might not the rise in supply in a normal world push down pay?).

And all over the world shareholders are beginning to get it. We may now finally be entering the end of the phase in which shareholders and, via rising inequality, economies are held to ransom by small groups of greedy men. Good.

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