According to Reuters, even the business leaders at Davos are wondering why shareholders haven’t revolted against high pay:
Several business leaders, speaking candidly during closed meetings, pointed to growing social inequality and said there was a need for more effective tax collection from the best paid.
And while critical of regulatory efforts to cap executive remuneration, some blamed overly generous compensation packages on a lack of shareholder engagement in the issue.
“It should be up to the boards, not the regulators. Where are the shareholders of these banks?” the head of one investment bank told Reuters. Like others who spoke about the issue, he declined to be named.
Studies both here and in the US have concluded that there is little relationship between the pay of senior executives and company performance. The Telegraph even suggested last week that the correlation might be negative; some of the more modestly paid CEOs having delivered better results than the higher earners.
Investors can be forgiven for feeling nauseous. While the index went precisely nowhere between 1998 and 2010, causing deep anxiety for those saving for their retirements, chief executives were cushioned from these worries. Their remuneration across the FTSE100 rose by 13pc each year, dwarfing the 3pc rise in annual earnings. Some must bear responsibility for the strategies, which have brought their companies to grief, and various western economies to the brink of bankruptcy.
However nauseous they might be feeling, investors have done very little to stop the huge rises in executive pay. Bank shareholders seem to be particularly lethargic. Even with compensation ratios reaching new levels of bonkersness, the shareholders simply shrugged.
The government plans to give shareholders more power to ensure that executive pay is linked to performance but, given the lack of shareholder activism so far, there is little evidence to suggest that they will use that power.
There’s a further complication too. To an extent, it was the attempt to link directors’ compensation to company performance that got us here in the first place.
Source: Manifest and MM&K Total Remuneration Survey
Taking 1998 as the base year, the Manifest and MM&K Total Remuneration Survey (quoted by Full Fact) found that the share related elements of CEO remuneration (Options and LTIP) were responsible for much of the increase in their pay levels.
The picture in the US is similar, as this study by Professor Martin Conyon shows. Professor Conyan notes that equity-based incentives account for much of the differences in executive pay between countries. American CEOs are paid more than their European counterparts partly because US firms are bigger. But, even if you control for size of firms and different industries, American CEOs’ pay is still significantly higher, largely due to their share-related compensation.
Broadly speaking, the more a country links its executive remuneration to shares, the more its CEOs get paid.
So the shareholders are failing to rebel against high executive pay and the pay schemes which were supposed to link executive pay to company performance have fuelled the pay boom.
It looks very unlikely, therefore, that empowering shareholders will do much to curb executive pay. Not all investors are keen and, if past performance is anything to go by, shareholder inertia and general lack of interest is such that trying to boost it with extra powers might be like trying to re-charge a flat battery. Even if there is a widespread shareholder revolt, which insists on linking pay to company performance, all attempts to do that so far have led to schemes which have simply made senior executives ever richer.
Shareholder empowerment might make good headlines and make the government look as though it is doing something but probably won’t do much to stop the rise and rise of senior executive pay.