The latest ruse of the City fat cats

The ‘shareholder spring’. It looked like it was going so well for a brief period last year. But a quick skim through last weekend’s papers should make it clear that the effort by shareholders to force down the ludicrous pay deals that top executives at our listed companies like to award themselves hasn’t exactly gained the traction some of us hoped it would.

Look at Prudential, where the Mail notes that a “trio of senior executives saw their pay packets rise by 18% to almost £20m last year.” Chief executive Tidjane Thiam took home a total of £7.8m in pay and perks. Nice work. He is not the only one.

The chief exec of Standard Life – a fund management firm that has made a big deal out of campaigning against excessive pay – accepted a 90% pay rise. He will now get a package worth £5m. Then there is Patrick Regan, finance director of Aviva.

This is all part of a relatively unattractive trend: according the Telegraph, UK chief executives as a whole are enjoying something of a bonus boom. Average real wages across the country may continue their multi-year slow motion collapse, but thanks to generous bonus deals, pay for chief execs is up over 15% (that’s five times as much as it has risen for the middle managers who mostly do the work). The median FTSE 100 CEO salary is £3.4m, up 260% since 2000. The average worker salary is £26,500, up 40%. 

There is still talk of protest. Yesterdays’ FT noted that ISS, a proxy adviser (in that it tells shareholders how they should vote) asked investors to block Credit Suisse’s attempts to dilute their holdings by issuing new shares with which to pay employee bonuses. This despite the fact that the bonuses in question come with “no performance targets”.

Last week Guy Jubb of Standard Life Investments (while presumably aware of the thin ice under his feet – see above) also took aim at BP’s pay policies saying that they are too complicated (there are 15 “performance metrics” involved) and “allow executives to be rewarded handsomely for poor performance”. Bad thing.

Calpers – the largest of the US public pension funds – also says it is going to focus on taking on rogue pay agreements this year, voting against many and putting pressure on the SEC (Securities & Exchange Commission) to create ways for boards to be held accountable when their pay structures are voted against. There is also some talk of success.

Last week 63% of Julius Baer shareholders voted against the bank’s remuneration (albeit in a non-binding vote) and yet another article on the subject in the FT last week claimed that the UK’s big companies are listening: apparently the median pay rise for FTSE 100 chief execs for 2013 is a mere 2.6%.

But the truth is that not much has changed. The huge awards keep on coming, and, for all their talk, our big shareholders aren’t doing much about it. Last year, votes against pay reports came in at around 7% (at the AGMs of FTSE 350 companies), and in the US, supporting votes were over 90%.

And as for the low headline pay rise rates, they are, says Ben Laurence in the Sunday Times, mostly meaningless. Why? The LTIP (long-term incentive plan). This isn’t salary, it isn’t discretionary bonus and it isn’t share options either. Instead, it is a complex combination of the three. Basically, it means that the CEO is entitled to a payout of shares if he meets all or some of a series of performance targets, with his gains crystalising over rolling periods of three years.

In practice, it appears pretty hard for a CEO to not get a large part of his LTIP every year. That’s because the targets are set so that they can still be received even if the share price falls, and because a good many of the targets are measured, not in absolute terms, but relative to the industry.

So even if the company is doing badly, as long as it isn’t doing worse than others in the sector, its directors still get to get rich. And get rich they do: LTIP “winnings are now the largest single element of total remuneration” for top execs.

Aviva finance director Patrick Regan has an LTIP. The long-term is defined as three years (!) and success is defined in a way most of us won’t really understand: the shares have gone nowhere in the last three years but he still gets nearly 70% of the 2010 award. He earned £1.5m last year and could be in line for double that next year. Again, nice work. 

There will be change at the end of this year in the UK when executives will begin to face binding votes on pay every three years, and to have to make an effort to set out their remuneration reports rather more clearly than they contrive to at the moment. But will this really lead to any lasting change? It’s hard to see it.

As John Kay points out, “investors in the UK are a disparate lot. Usually the top ten shareholders only hold between 2-5% of a company. No one has very much influence”. It is also worth remembering that, while most CEOs aren’t nearly as clever as they and their remuneration committees would like you to think, they aren’t exactly dimwits either.

They’ve kept their pay at shockingly high levels throughout one of the greatest financial crises in decades. Who’s going to bet against them continuing to do so? 

• For a full explanation of how we got to the point where top executives are so stupidly overpaid, see my previous blog posts on the talent myth

• Remember the nonsense about how, in the banking sector at least, bonuses provide ballast (they fall in the bad times to keep fixed costs low)? It has been blown out of the water by the recent review of Barclay’s corporate culture. What has actually happened is that “compensation has been more variable upward in response to good performance than downward in response to bad performance.” It goes up in good times but never comes down in bad times.