High Pay – are shareholders that bothered?

There’s plenty to chew over in the High Pay Commission’s Interim Report (and I will when I’ve got time) but one of its findings is that the pay of senior executives and other highly paid employees has risen significantly faster than share dividends. The implication is that money which would otherwise have gone to shareholders was used to inflate the pay of  senior employees. High Pay, says the Independent’s Ben Chu, is bad for business:

[T]he stronger argument in the report is that highly-paid employees are not delivering value for money for shareholders.

The Commission cites a couple of powerful pieces of research to make that point.

1) A survey in 2010 found that between 1998 and 2009 the pay of chief executives of FTSE 100 companies rose by 6.7% a year, while earnings per share fell by 1% a year over the same period. This isn’t pay for performance; it’s rewards for failure.

2) Last year Barclays awarded its employees three times as much in bonuses as it paid investors in dividends. And as I have previously pointed out, UK bank shares have massively underperformed the stock market in recent years, while gigantic bonuses have still been paid out. Banks are  being run in the interests of their employees, not their  owners.

That last sentence might seem a slightly odd comment from a left-of-centre newspaper but, again, I’ll return to that later.

I discussed the question of high bank bonuses and the impact on shareholders in January. The compensation ratios (the percentage of revenue paid out in remuneration) for banks range from high to huge. Over the past five years, investment banks paid out three times more cash in salaries and bonuses than they did in shareholder dividends.

Yet the shareholder revolts, predicted by many, never came. As Ben Fletcher pointed out in the comments to my post, no-one is forcing shareholders to keep their investments in banks. The same is true of companies with highly paid chief executives.

Investors may have failed to stop the boom in high pay but, apart from the occasional shareholder revolt, most seem to have concluded that it is not in their interests to do so. High Pay may, as Ben Chu says, be bad for business, but not bad enough to make shareholders do anything about it.

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4 Responses to High Pay – are shareholders that bothered?

  1. Pingback: High Pay – are shareholders that bothered? - Rick - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

  2. Looking at the major Barclays Shareholders it’s clear why there isn’t a revolt over senior management pay. A large portion is made up of Qatari investments and I am guessing that disproportionally high pay and bonuses will be fairly low on their list of issues and concerns. Other investors are likely to be institutional where it could be argued that their senior executives also benefit from a top heavy remuneration package. Little likelihood then of any shareholder revolt having teeth and I suspect most of the push back from investors has more to do with PR than anything else.

    What does concern me though is the impact on all our pensions and savings. At the same time that pay and bonuses are going through the roof the returns on Life Assurance policies for example are bumping along the floor. I know that a lot of these were mis-sold but if there a large bonuses and pay within the upper echelons of FTSE100 corporations surely this indicates that investments should be back on track. Apologies for slipping in to a utopian world back there and I may a bit too much of a simplistic view of how all this works to be relevant.

    On the flip side during a start-up phase of a new business the investors always insist that you take a ‘reasonable’ salary which happens to make a lot of sense. A case of do as I say but not as I do?

  3. markymark says:

    I think that this is a massive problem that isn’t restricted to the banking sector.

    John Bogle the founder of the Vanguard fund believes that this was more or less the major cause of the financial crisis.

    He calls this the principal-agency problem. Corporate governance theory suggests that the executives, of say a bank, are meant to be the agents of and act in the best interest of their principal, namely the company (and by extension the shareholders). Instead, it is clear as daylight that they have acted and continue to act in their own personal short term self interest at the expense of the principal.

    The shareholders are either too small to make a difference or institutional and don’t want to rock the boat.

    I think this is a very real problem and it’s worse than stated – not only are the employees taking an outsized share of the profits/income but that much of that profit may itself be illusory in that it ignores hidden risks that will only come to light down the track when the employee is long gone and be borne by either the shareholder or taxpayer.

    I think it is interesting to contrast this with law firms where the “shareholders” are also the executives (i.e. partners). You have a very different dynamic. The “shareholders” are not too far from the coal face and periodically purge costs – cutting benefits, sacking support staff, sacking poor performing assciates or teams. The shareholders are so ruthless that they even sack other partners if they don’t pull their weight. Law firms are run by the “shareholders” entirely for the benefit of the shareholders.

  4. Tom P says:

    I agree shareholders basically aren’t that bothered about PLC. There’s a bit of noise over performance linkage, and the occasional defeat (one so fat this year – easyJet), but the fundamentals don’t get challenged. Fund managers seem to work on the assumption than an extra million quid here or there isn’t worth kicking off about because a) it means you get the talent and b) it’s a relatively small sum compared to other outlays.

    Obviously in aggregate this is a problem because every company says they need to pay top whack to get the talent, and that pushes up pay across the board. This much is (almost) admitted by some fund managers, but they don’t seem to have much appetite to do anything about it. Add in the fact that quite a few management business are part of PLCs (and/or bigger financial institutions) themselves, and that portfolio managers aren’t exactly on rations and it’s not surprising that we see what we do.

    The big question – which the HPC hints at – is whether any attempt to look at reform of exec pay therefore also needs to look at who should decide. Today it’s notionally the ‘owners’ (if you believe that’s what shareholder are) but this model doesn’t seem to have been very effective…

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