Executive with carrot and stick

The system for paying top executives is broken. Look at the people who think so. “Enough is enough,” says Richard Buxton, chief executive of Old Mutual Global Investors, adding that executives being rewarded for substandard performance is damaging relations with “employees, customers and the community”.

Top managers’ pay has become a “lightning rod for public discontent”, says Paul Drechsler, president of the CBI, the UK employers’ organisation. Fidelity International, the asset manager, calls for “stronger consequences” for companies that lose shareholder votes on pay.

Opponents of the current set-up have suggested a range of reforms to a UK government consultation: forcing out the heads of remuneration committees who fall foul of shareholders; requiring binding annual votes on executive rewards, and instructing companies to publish the ratio between top executives’ and average employees’ pay. Others have called for the scrapping of long-term incentive plans (LTIPs), which can provide huge payouts, and their replacement with restricted shares that executives have to hold for more than seven years.

All these proposals have merits but are unlikely to do the job. Campaigners and regulators have been trying to reform the system for decades, yet dissatisfaction has continued to grow about the size of top executives’ pay packets and the weak link with corporate performance.

Even restricted shares have been around for some time — and these, too, have been criticised for giving chief executives rewards unrelated to their achievements: top managers can enjoy bonanzas if the stock market rises for reasons beyond their control. And restricted shares can still produce startlingly high payouts. Gary Cohn’s $100m exit package when he left Goldman Sachs to become Donald Trump’s economic adviser included $35m in restricted shares.

That so many of the other changes of recent decades — more independent remuneration committees and performance-related share options, for example — have failed to answer the concerns of even the most fervent supporters of the capitalist system suggests that we have been asking the wrong question.

Instead of asking why chief executives are receiving such disproportionate rewards, we should start asking whether we are encouraging the right sort of people to become chief executives.

Until now, almost all executive pay reforms have been aimed at encouraging company leaders to act in the long-term interests of shareholders. If they have owned shares themselves, through share options, LTIPs or restricted shares, the reasoning went, they would do what was in shareholders’ best interests rather than just serve themselves.

The problem was that these devices have often seemed to distort chief executives’ behaviour even more, encouraging them to take risks with the company’s future to boost the stock price when the time came to take control of their shares. Receiving shares that they must hold until after they retire could mitigate this, but we need to ask: what kind of people are all these proposals aimed at?

The idea that leaders will not run their companies responsibly unless the right juicy carrots are dangled in front of them suggests they are a greedy, idle and disloyal lot — that they will not put in the hours, or will place their own interests before those of the organisation, or will spend their time taking headhunters’ calls about jobs elsewhere unless they are given the right incentives not to do so.

But surely the real reward of leading a company should be to succeed in the role, to retire with plaudits, respected everywhere for what a great job you have done — not just for shareholders but for employees, customers and the wider community.

Of course chief executives should be well paid. It is a horribly demanding job. But 10 or 20 times the average employee’s pay should surely be enough — not the 154-times ratio that prevails between top UK chief executives and the typical worker. And if there are shares or cash profit handouts on top of that, they should be given to the workforce too, without whom no corporate achievement is possible.

It will take courage for companies to break with practice and adopt a simpler system. There is comfort in doing what the remuneration consultants say other companies are doing. But the pressure for change is building. Boards who move to a fairer pay approach will be applauded, and might even end up attracting a better class of chief executive.

Twitter: @Skapinker

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