Will remuneration ever get a fair hearing in the media? Article icon

Will Helen Dunne reviews a lively morning discussion


The big executive pay explosion started in 1992, when share option rules were changed; if you look at the return on capital for the 20 years before 1992 and the 20 years subsequently, it has not changed a bit. If you look at the FTSE 100 index over the past 15 years, turnover has gone up five times and profits up three times. Other times being equal, profit has gone up three fifths of turnover which suggests continuous pressure on margins which again suggests that the performance is not coming through. If you take any measure of corporate performance, be it share price or growth of profits, and compare it to the remuneration of the chief executive, there is absolutely no correlation. While we may believe in performance pay in principle, we are not getting performance pay in practice.

An academic paper suggests the bigger the bonus, the less likely the person is to perform. Bonuses work on mechanical tasks, like piecework, or payments like commission. Bonuses in intellectual pursuits are counterproductive. We have a system that is completely and utterly dysfunctional. It is not a question of the newspapers giving a fair hearing to the executive pay, but it is time society as a whole got a fair deal from business.

I would confess to feeling angry and jealous; the better you know the chief executive, the more alarming it is to discover how much they earn. I welcome shareholder activism, but I am very sceptical about the degree of follow through. You just have to look at the proportion of UK equities that are held within the UK: I think it is 30 per cent. Even if they all agreed, talked and cooperated, they only have a limited amount of clout. They have managed to have a big impact in a short time but the more they do it, the less impact there will be.

Companies need to engage. Big companies are concerned about shareholder activism, but they don't know what to do about it. It is easier to do nothing and let the thing roll on. The consequences are we will end up with legislation, which will be no good for anyone.

Generally speaking, the hostility about pay is not directed at those who are well-paid entrepreneurs, such as James Dyson, who have created businesses. It is directed at the civil servants with share options who run most of our companies, whose success is based on their ability to get to the top of a company not on their ability to run a business.

Most executives deny that pay is the motivator: they claim pay is recognition after the event. People do jobs for status, interest, for appreciation, for lots of things other than money. The idea that you have got to pay somebody £10 million to run a big company, I would dispute. You only have to pay them £10 million if the head of a similar company down the road is getting £9 million. It is a comparison problem that we have; the quantum has become irrelevant. You can never pay an investment banker enough because there will always be another getting paid more.

Why did the Shareholder Spring happen? We shouldn't underestimate the political pressures and the fact that institutional investors could see regulations being imposed on them in the future if they did not act. In 2002 after the dotcom crash, and the recession, there was a plateau on executive pay for a year before it started zooming back up again. I think that corporate governance sections in big institutions were on guard against this happening again, and started preparing their defences. They were up for the fight.


It should be shareholders who set or approve pay, because the alternative is that it will be bureaucrats or worse still politicians. That has focused my mind for a long time. We have a facility for our 130,000 private clients that use our nominees, ISAs and pension funds, and we allow all of them to use their votes in meetings. The tragedy is that very few did until recently. If we don't mobilise shareholder activism, we could get regulation.

Fund managers ought to publish the way they vote to give us a better understanding. Public capitalism is becoming more expensive. We need to engage shareholders more. I would argue that 80 per cent of earnings for some companies come from their global operations, so I don't have a problem if they try to justify remuneration against a global peer group. I think the real issue is rewards for failure. We have seen people who have seriously failed to deliver value and that's when shareholders get angry.

I thought the press played to the gallery when it came to [Royal Bank of Scotland chief executive] Stephen Hester's bonus, when it was described 'as the most disgusting bonus'. I thought Is it better to have a cheaper, less competent person trying to save the bank? Vince Cable's idea to have employees on remuneration committees is not sensible. Again, one should stand up and say that employee shareholders do have the right to vote at the annual meeting. The remuneration report comes out after the event. We need to see something that comes out beforehand; companies should set out what they are going to do, what they are going to deliver and their aims and objective and announce that pay will be in accordance with delivery.


The Shareholder Spring and greater voting enthusiasm is to be welcomed, but I don't want to overstate the claims. I am quite suspicious about why fund managers are behaving like this, and quite sceptical about what they will achieve.

There are peculiar things happening. Andrew Moss, [former] chief executive of Aviva, got a 90 per cent vote in favour of his re-election; three days later, he's out because shareholders didn't have confidence in him. Shareholders had the opportunity to express that opinion at a vote and didn't, but chose instead to vote against a remuneration report.

I think the debate is still wedded to the illusion that you can measure executive performance in such a way that you can calculate exactly the right level of executive pay. If you really want to improve things, you need to get better people on the board. For that, you need to get shareholders involved in the process of selecting those people. The usual justification for high remuneration is that executives operate in an international marketplace. Marcus Agius, chairman of Barclays, maintains that the bank pays the minimum it can get away with. Then you open the annual report, and see such astonishing sums that it makes it hard to take him seriously. It is not comprehensible.

Too often, companies are beguiled by the belief that there is a superstar chief executive out there. Very often it is a failure to manage for succession or develop their own talent internally that is the real underlying problem. William Hill recently paid a retention bonus to [chief executive] Ralph Topping, who ironically was employed after the company looked outside for a superstar and found the best guy for the job was sitting in the building. And then when it comes to succession planning for him, they find they still haven't got a solution. You would think they would know better.

GlaxoSmithKline had an extraordinary line in its remuneration report to the effect that it needed to give [chief executive] Andrew Witty a pay rise to ensure that it could attract chief executives in the future. I got the impression that he didn't want the pay rise but that the board heaped it upon him because they were worried they would get out of step with the market.

The great advantage of the Swedish model is that you do get directors on remuneration committees who are directly answerable to shareholders, because they have been put in place by shareholders. At the moment, it seems that the selection process for non-executive directors in the UK is the sole preserve of the chairman so their loyalty is to him rather than their shareholders.

I think chairmen of remuneration committees should be prepared to stand up and defend their decisions. I have been to a couple of annual meetings this season when they stood up and read a prepared speech, but questions from the floor were handled by the company chairman and deflected away.


Performance related pay has ended up distorting a lot of end products for investors. Boosting earnings per share is one of the metrics judged for executive pay, which I would suggest has led to an increase in share buy-backs; these are unsatisfactory compared to enhanced dividends. Over the last 15 years, there has been a rise in pay consultants who advise the board on remuneration and benchmarking. I think this development has been exceptionally unhelpful and has led to an arms race in executive pay. Remuneration committees should be encouraged to do a bit more independent thinking.

The rise of proxy voting services has, I think, done a lot of damage. They are not always the most professional researchers, but they are influencing quite a significant amount of the voting by institutional investors, who act like sheep in these situations.

Remuneration reports are baffling; you might as well be looking at a report that's written in Serbo Croat or a rewiring plan of Concorde. As a journalist, there is only so much time you can devote to reading these which is probably why we take our lead from shareholders themselves.

Benchmarking against the City is becoming very relevant. I remember when the board of Royal Bank of Scotland received bonuses for the successful takeover of NatWest; [then chief executive] Sir George Mathewson said What I got paid last year wouldn't earn me bragging rights in a Soho wine bar. Chief executives really care about investment bankers making so much money. Ultimately, Shareholder Spring is the yardstick by which the chief executive ought to be judged over a one, three and five year horizon.

Why has the Shareholder Spring started now? Investors have had years of average returns, and I suspect a lot of institutional shareholders are now coming under pressure from clients to do something about it. There has also been an enormous rise in overseas investors in the UK market. Those UK institutions that have remained are, more often than not, index trackers. If they are compelled to hold the stock, they will agitate for change if they don't see the management doing their job properly. Most people have seen a huge reduction in their living standards in recent years, and they will be getting in touch with newspapers about this. If you read the letters pages, people are very angry about this.


I don't think executive boards really appreciate how big a deal this really is. I have never heard a client say I can't possibly justify my salary, I'll come across as overpaid. I think they are just ticking boxes now in order to get these payments approved by shareholders.

Advisers never get brought into the debate until they get to see the annual report and remuneration report. Nobody ever asks us how they should position this, whether the payments are justifiable before the deal is actually signed and sealed. As a PR, we only get dealt with the finished product. Many reports are completely inexplicable. The role of the Remuneration Committee is rarely clear. Boards need to justify why executives are paid so much and explain the reasons and rationale in ways that we can all understand.

The justification for high remuneration used to be the peer group in this country; now they look at the peer group in America, Russia or wherever they can find the highest paid person in their industry. The average shop floor worker's salary has gone up 1.1 per cent over the past year, compared to 11 per cent for executives.