Anthony Hilton: The public doesn’t care about the logic behind executive pay

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It is also one of the first big fund managers to express a view on the impact of what are known in the trade as the Bis Regs — the legislation passed by Vince Cable’s Department of Business and Skills in the last government.

Cable was aware of the public outrage over levels of executive pay and anxious to be seen to be doing something. The result was legislation designed to force companies to consider more clearly and explain publicly why they paid executives as much as they did, and to prompt shareholders formally to accept the policy and to intervene more readily in cases of obvious excess.

Most think there has been no sign of a reduction in what executives are paid, though fund manager Fidelity went public a few days ago saying it thought things were beginning to cool.

L&G’s verdict was more nuanced. Specifically it complained that companies were still poor at linking performance targets for executives with the declared long-term goals of the company.

It was concerned that when an outsider was hired, a whole new set of rules was too often invented to accommodate the new person. It also wanted stricter definition of the conditions for increases in executive salaries as opposed to bonuses.

It was not overwhelmingly enthusiastic about the impact of the rules though in general it thought there was more information and policy was a bit clearer.


At a seminar last night organised by Parc, the Performance and Reward Centre, several of those involved in the setting of pay were a bit more negative. They thought the rules had been a distraction and that companies had responded by talking too much about process and not enough about principle.

They had been good in the sense that they had forced firms to think more clearly about what they were doing, in making non-executive directors and remuneration committees much more aware of their responsibilities, and in introducing more structure and less discretion into awards.

They had been bad in the sense that rather than solve the problem of excessive executive pay the regulations simply passed the buck to shareholders who do not have the power, the time, the knowledge and, in most cases, the inclination to be able to exercise the proper level of control consistently and effectively.

Unfortunately, although it is important that people should understand the pay awards are established logically and coherently, this is not actually the root of public resentment.

Their concern is not whether the game is being played according to the rules, but whether the game itself is fair. The public are alarmed at how much these people get — outstripping the earnings of doctors, lawyers, architects and other professionals, though it never used to.

They worry that if everyone were as self-serving as the business community, society would cease to function. They see it as evidence that the capitalist system has been high- jacked by a minority for their own benefit.

And in spite of all this talk about pay for performance they do not see any evidence that business is better run than it used to be. Indeed, this month the High Pay Centre published research which couldn’t find any link between pay and performance.

It is hard to see the system getting any better. Remuneration committees and boards are almost all terrified that if they try to curb an executive’s excessive demands then the executive might leave.

Whether that would ever happen is a moot point, but they feel it is not worth the risk — and that no one would thank them for their principled stand should the company then fall apart.


Shareholders will never exert the necessary control either while they haven’t the faintest idea what some of these complex pay packages are worth. And how can they understand when the executives and Remcos don’t understand them either?

Indeed if there was one rule which might improve things it might be to make it illegal for Remcos to agree to any pay package unless they knew what it was worth.

What’s needed is for the Government to promise to abandon Cable’s legalistic approach if remuneration communities can come up with something simpler.

One suggestion is to give executives a rate for the job — with no bonus or incentive plans — and insist a big slice of what they got was invested in the company’s shares and held for 10 years.

It will need to be that radical to cut through the present nonsense. Cable’s regulations call for the publication of a single number to reveal the total amount the executive received in a given year.

But BHP Billiton accounts have one single number calculated under British accounting rules, and the same number calculated under Australian rules. The numbers should, of course, be identical. But they are not.

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May 28, 2015 |
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