Are shareholders exercising enough control over executive pay? And should there be further controls or may be legislation to prevent complaints of 'fat cat' payouts?
Stuart Bell of Research Director of Pensions and Investments Research Consultants PIRC the independent research consultancy specialising in corporate governance argues for greater control. Jon Moynihan, executive chairman of PA Consulting, the management and technology consultancy says that unlimited upside has an important role to play in enhancing shareholder value.
Stuart Bell
We think that top quartile remuneration should be available for top quartile performance. There is a fundamental issue about what directors are there to do. Shareholders have a right to expect directors to do their best that's why you pay them a salary. Bonuses and incentives should be for exceptional performance.
When shareholders are asked to vote on new incentive plans or option schemes, the performance conditions that are suggested are almost never explained, demonstrated or even asserted. So the suspicion is always left in shareholders' minds that minimum performance criteria have been chosen on the basis of what the directors think they can get away with rather than demonstrating how challenging the target is.
It is very difficult to put upper ceiling limits but there is the general point of equity or justice. Some assume that directors are there only to boost the share price; that shareholder value is the prime focus of directors. We believe that you cannot separate it from the issue of a company's social responsibility, its position within society, its attitude towards its customers, suppliers and employees. Whereas within U S culture where a lot of these remuneration ideas tend to come from, it is a lot more acceptable for there to be no limit at all on what people can earn, I think we have to recognise that within a European social context there are different public and community attitudes towards what is regarded as fair and just.
So while we don't have a view on whether they should be any particular upper limit it is important to recognise the economic and cultural context. I think legislation is still some way off but in the vast majority of companies there is no apparent linkage whatsoever at the moment between remuneration and performance.
There is also an issue of accountability to shareholders. So long as shareholders are unable to authorise directors' remuneration levels there will always be an accountability gap. If there was to be an annual vote on remuneration policy, or shareholder approval of the remuneration committee report this would give legitimacy to the whole area of directors' pay and cut out the perception that directors are setting their own pay and are unaccountable to anybody.
Jon Moynihan
What is needed is clear thinking about what maximises shareholder value.
We agree that remuneration reports and remuneration policies should be voted on by shareholders and it is important that these policies and programmes can be explained to shareholders.
We at the PA propose a code of compensation conduct that is independent of individual companies. Then companies can report on whether they align with that code of compensation conduct or not.
We believe that people get confused between social values or social engineering verses what actually does maximise shareholder value.
Limiting pay does not maximise shareholder value. If you limit the upside people will tend to do the minimum required to achieve that upside. Unlimited upside is very important in our opinion.
Our evidence from surveys conducted in a dozen major countries is that companies who pay high salaries, that is to say fixed compensation, to top executives give significantly less returns to shareholders than companies which tie reward to whether or not shareholder value has been created.
Calling for a ceiling is muddled thinking. It's back to the politics of envy and is foolish because it is argued for social reasons not for shareholder reasons.
We at PA believe in the win-win. Maximising shareholder value and maximising value for other stakeholders are not opposed to each other. When you maximise shareholder value then you maximise returns to other stakeholders.
You create value for shareholders by creating value for your customers. You will be able to pay your employees more and to hire more people. You pay more taxes so the government gets more tax revenue. People who argue that there is a battle between shareholders and others stakeholders are the old zero sum game people. They have a flawed view of the way in which businesses work and that in order for one of the stakeholder to win they have to grab value from other stakeholders. That is because they think the pie always stays the same size. But in fact successful strategies in growing shareholder value come from growing the cake.
The key thing is to make sure that managers get rewarded if shareholder value is increased. PA's research shows that in companies that do this all the way down through the organisation for the entire workforce, the share price will go up even more. So at the end of the day it is not just a top management thing at all.
This article appears courtesy of CBI News.
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