Should shareholders be granted powers to curb executive pay? In a debate for London Loves Business, CPS Head of Economic Research Ryan Bourne tackles the TUC's Brendan Barber.
"The past months have seen populist high-pay bashing occurring throughout politics. Spawned by anger at bonus payments for bankers in bailed-out institutions, the politicians from all parties now appear to have widened their nets to incorporate executives of all companies, with the justification for ‘action’ being that their pay is not always reflective of company performance.
Whilst this may be true, it is incredibly ignorant about the way that pay is agreed. Pay is not, and never will be, merely a reflection of performance, but is determined by a host of supply and demand factors. For executives, it will inevitably be linked to the alternative opportunities which individual executives forego, the size of the firm, the type of market in which it operates, and many other factors.
But more than that, performance is subjective.
Shareholders might be extremely happy to appoint a highly paid CEO who helps avoid the company folding, even if the business continues to make significant losses.
But even if you believe that pay should be inextricably linked to performance, it’s unclear why there has been such a focus on CEOs. The Income Data Services report, which showed that FTSE 100 directors’ pay had increased by 49 per cent over the past year, certainly provided the trigger for debate. But if this was an issue of principle, a range of other industries also pay relatively unsuccessful people huge amounts. Football, film, private equity capital, and many senior local and national government tiers are all well paid, with little link to performance.
The truth is this debate has been riddled with inaccurate information. While overall pay for executives rose by 49 per cent last year, within that base pay rose by just 3.2 per cent and bonuses by 13 per cent. Yes, these figures are still higher than experienced by the rest of us. But what it shows is that most of their increased remuneration was driven by incentive plans and options which are strongly linked with stock-market performance. FTSE 100 earnings per share were up 39 per cent in 2010, and the FTSE 100 went up by 9 per cent in that year. Because performance has to be assessed before payments are made – i.e. there’s a year’s lag – the increased pay in 2011 reflects reward for performance in 2010.
And there is little evidence of supposed ‘cronyism’. Manifest, a corporate governance group which carries out regular surveys, recently showed that only 5 per cent of FTSE 100 executive directors serve as non-execs on boards of other FTSE 100 companies and only a small number sit on other companies’ remuneration committees.
As politicians try to make political capital on ‘reforming capitalism,’ we should therefore be wary of the attack on high pay. While more transparency and increased power to shareholders is desirable, current rhetoric risks trying to override market forces in the name of ‘fairness.’ Do superstar CEOs justify superstar salaries? If the shareholders think they are doing a great job, then yes. For it is they, not the public and certainly not Government, who could and should make that judgement."
To view the full debate and get involved yourself, visit London Loves Business.