Executive pay: is it really excessive?
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Associate Editor
David Stevenson Jul 31, 2009
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Executive pay and perks seem to be racing ahead regardless of the recession. Why? And does it matter? David Stevenson reports.
Whose pay packet is in the news now?
That of Porsche chief executive Wendelin Wiedeking. Top dog at the car maker since 1993, he has also been Europe's highest paid CEO, with an annual salary of $100m+, according to BusinessWeek.
But many blame him for lumbering Porsche with huge debts and a diving share price after a troubled attempt to take over VW. He's leaving the group with an estimated €50m retirement "golden parachute".
Is Porsche a one-off?
Far from it. Executive pay and perks have long operated in a parallel universe to everyone else's. America set the tone – 50 years ago the median pay of top US executives was 30 times an average worker's salary; by 2005, the ratio was nearly 110 times.
Meanwhile, although top British bosses used to be paid a much lower multiple of 'shop floor' salaries, they've been "catching up" over the last 15 years, according to Vincente Cunat at the London School of Economics. The average pay package for the CEO of a UK FTSE 100 company rose by 287% over that period.
Don't CEOs deserve their pay cheques?
The standard arguments are that being a CEO is a tough job and to attract and retain the best you have to pay top dollar, particularly in a globalised economy. If British companies, for example, were to cap pay and perks, the best directors would simply walk into jobs overseas. And as a CEO's shelf-life can be very short if they are dumped for not performing, remuneration has to be high to compensate.
But apart from the obvious argument that comparatively low-paid people such as nurses, teachers and army recruits also do tough jobs, there's the fact that their pay packets seem to bear no resemblance to performance.
If a CEO adds £100m in profit to a firm over five years, no one would begrudge them a pretty hefty slice of it. But all too often "golden parachute" deals ensure CEOs are paid whether they succeed or fail. The 287% rise in British pay noted above, for example, reflects a period when the FTSE 100 has fallen, not risen.
Has the recession made a difference?
Not much. "The boardroom bonus culture is still booming," says The Guardian's Simon Bowers. Britain's directors are still receiving almost a third of their salaries in performance-related bonuses, despite tumbling stockmarkets, shrinking profits and one of the worst recessions in living memory, says a recent management pay survey by Income Data Services.
Although salary rises for FTSE 350 index company directors slowed in 2008 compared to 2007, according to business advisory firm Deloitte, the median increase was still 6.2%. That was still around 2% higher than increases in Retail Price Index inflation and average earnings, says Carol Arrowsmith, head of the Deloitte remuneration team.
Why is CEO pay still so high?
It's partly down to the way wages are set. Remuneration committees are tasked with setting and vetting pay and other benefits before approval by shareholders at an annual meeting (AGM).
But these are usually staffed by well-paid non-executives who were once executive directors. That's one bunch of turkeys who will never vote for Christmas.
Shareholders are pretty toothless too. Several FTSE 100 firms have recently met with resistance. BT Group saw a 17% protest vote, including "active abstentions", while some 40% of investors at Cable and Wireless either voted against directors' pay packages or abstained.
Yet such votes are only advisory, "and appear to have been largely brushed aside by the low-profile non-executive remuneration committee members", says Bowers.
The other issue is what City minister Lord Myners described as "the ownerless corporation", where quoted firms do more or less what they want regardless of shareholders' wishes.
Part of the problem here is that a focus on short-term performance means big fund managers don't act like long-term owners. If they don't like the direction in which a firm's heading, their first instinct is to sell the shares rather than promote reform.
There's also the sneaking suspicion that fund managers don't want to kick up a fuss about corporate bosses for fear of drawing attention to their own pay packets.
Is paying directors in shares a better option?
Previous reports have suggested that shares, or options, are better than pure salary because they link a director's pay to the share price. But unless awards are made over a long (say minimum five-year) period they encourage short-termism and risk taking.
That explains the pre-crunch debt bubble: high gearing boosted short-term profits, lifting share prices and directors' pay. Better to pay a decent bonus based on long-term performance. Share awards alone guarantee nothing.
Will the latest reform proposals help?
A report by City grandee Sir David Walker on banking governance recommended measures including delaying bonuses for three to five years, beefing up the role of non-executives, and revealing the pay of a wider range of staff in the annual report. He "has given investors the weapons to control boardroom pay", says The Guardian's Nils Pratley, and "turned the spotlight on City institutional shareholders".
But will it work? The trouble is, "pension fund trustees set the terms on which they wish their money to be managed". If they don't throw their weight behind reform, "the result probably will be drift and inaction". It's still a big leap "to believe fund managers would have the gumption to vote out the chairman of a big bank".
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