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.