Why it is time to curb the madness of executive pay
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There have been plenty of executive pay absurdities in recent weeks, from the £14m (up 20 per cent) awarded to BP boss Bob Dudley in a lossmaking year to the egregious £70m for WPP’s Sir Martin Sorrell.
However, one payout has been especially remarkable. Not because it was bigger than others (€7.3m is a snip for chief executive these days). Nor because it triggered a big hoohah from shareholders (it did not). But because it was awarded to Martin Winterkorn, the ousted boss of Volkswagen, who presided over the biggest scandal the car industry has probably ever known.
And the clinching madness was that €5.9m of Mr Winterkorn’s package was a “performance-related” award for 2015. This was a year in which the VW emissions-fixing scandal wiped €40bn off the value of the company within a matter of days, denting its reputation for reliability.
Mr Winterkorn left VW last September, protesting that he was “not aware of any wrongdoing on my part”. But this was the man in charge. If ever there was an illustration of a reward for failure, surely this is it.
All credit, then, to Sir Chris Hohn, the nearest that Europe gets to a US-style activist investor. As the Financial Times revealed on Friday, the boss of hedge fund TCI has taken a €1.2bn stake in VW, with a mission to shake up governance and pay at the eccentric German carmaker.
It is too late to recoup the money handed to Mr Winterkorn, but if TCI can change the broader culture, it could help VW improve its efficiency and reverse the share price losses it sustained last autumn. In the unlikely event TCI could force an overhaul of the ownership structure (which tilts power in favour of the region of Lower Saxony and the families of former bosses), it would further shrink the valuation discount the market gives this quirky group.
Sir Chris seems to reflect a broader sense of agitation among investors over issues of pay and governance.
Earlier last week, the FT revealed that Norway’s oil fund would start making an example of companies that overpaid their bosses. In the UK, the Investment Association has asked Nigel Wilson, chief executive of Legal & General, to lead a task force on a similar issue.
On Sunday, in an online debate of the FT City Network — a panel of top-rank financiers — Mr Wilson complained that the current system of executive pay was “very obviously not fit for purpose”. Participants said this was bad for shareholders, but also morally bad for society given the widening gap between executive pay and average wages.
It is about time the topic gained momentum. In the US, average pay for a top chief executive is more than 300 times median salaries, according to the Economic Policy Institute. In 1965, it was just 20 times. In the UK, that multiple is now 183 times, according to the High Pay Centre.
In the old days, the line from some shareholders was that CEOs’ pay deals did not matter. Their job was to protect the interests of their own investors — and paying £10m for a good CEO is clearly better than paying £5m for a bad one. A good CEO can make billions of pounds worth of difference to a company, and to investor returns.
In banking — where accusations of excessive pay can be levelled not only at CEOs, but also at investment bankers whose bonuses sometimes exceed their bosses’ — policymakers in Europe have acted. There is a ban on bonuses exceeding 200 per cent of base pay, although the rule applies only to senior staff and some have come up with “allowances” to dodge the restrictions.
Investors have a clear motivation to apply further pressure, here. Most banks’ biggest overhead is their staff. And many are no longer the profit engines they once were.
Sir Chris’s reason for targeting VW is not just that money has been wasted on excessive remuneration, but that the pay regime fostered an aggressive culture in which staff were motivated to cheat. It is the same kind of criticism that was made of bonus-focused investment bankers who sold risky derivatives to the world in the run-up to 2008. But the principle may well apply across other industries, too, including the now fashionable tech sector.
If mainstream investors, as well as hardline activists such as Sir Chris, press the issue, it will be unquestionably positive — for investor returns, of course, but also for society at large. It could help curb brewing scandals and fend off a nagging unease with the unfairness of capitalism.
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