Pay was a big theme when I interviewed Anthony Bolton this week.
We talked a lot about Fidelity’s pay – and hence his pay. I think the charges on his China fund are far too high; he thinks he and Fidelity are worth it and that he proved that with his extraordinary performance in Europe. I think that as you can’t predict performance (particularly in a new market) you can’t charge for it. So we disagreed.
But we also talked about CEO pay in general – at the big banks and at other large corporations.
I’ve written about this before, but it is back in the news now, thanks to the fact that Vince Cable would like to deal with the problem of dysfunctional executive pay in a very public way. He wants to force disclosure of total figures (including all perks and bonuses) and he wants to put employee representatives on company pay committees to keep an eye on things. He also wants to give shareholders more rights when it comes to voting down directors’ pay packages (making their votes binding – something you might have assumed they already were).
I’ve noted here before that extreme pay packages are often the function of unfair business practices – oligopoly power, too much state support, and so on. So the best way to deal with overly high pay is to remove the conditions in which abnormal profits can be made – my preferred, if long term, solution to this problem.
But failing that, who should do something about ludicrous pay packages?
I tend to think it should in large part at least be the UK’s huge and powerful fund management community. They are shareholders, and they represent the rest of us as shareholders. And every penny that goes out as excessive pay is a penny lost to shareholders: pay it as a bonus and you can’t pay it as a dividend.
So I asked Anthony if he thinks that big shareholders – Fidelity included – have a degree of culpability in the grotesque levels of pay inequality we see in the corporate world at the moment.
He doesn’t. It is he says “very difficult for shareholders to dictate absolute levels of pay”. It is OK for shareholders to be interested in “the shape of pay but not the level of pay.” Shareholders should make sure that pay is “results orientated” and symmetrical, but that’s it.
I’m not convinced.
It would seem to me that interfering in absolute levels of pay would be something fund managers should do: it isn’t about interfering; it’s about protecting their investors. And if you have a name like Fidelity behind you, surely you can say whatever you fancy to any old CEO.
Perhaps, says Anthony, you could if they were not delivering shareholder returns. But no one said anything to the banks, I say. “Well you don’t know”, says Anthony, “maybe we have said it… we tend to do it in private than in public”.
“Well I guess it didn’t work,” I say. Stand off.
So what next? I’m not sure we actually want to regulate levels of pay. So if shareholders won’t prevent corporate management exploiting their shareholders, who will? Anthony thinks it should be the non-execs. But I can’t see that working either.
In fact, if making the gap between average pay and big company executive pay lower is what Vince really wants to do, probably the only thing that will work is the idea of putting a couple of mid ranking employees on remuneration committees. Their role would be to remind everyone that in the real world £1m is a lot of money and that in most jobs you don’t get bonuses automatically – you have to earn them. That kind of thing.
Then we might extend the idea and put a few ordinary investors in every fund on the committee that decides the pay of their fund manager. My guess is that once they are paid less, they will be less quick to tolerate the very high pay of those running the companies they own.
All this will definitely mean that HMRC takes in a great deal less in the way of income tax (something we can only hope Vince has thought of). But it should go some way towards closing the pay gap too.