Monday, 28 November 2016

Why does the Government care about Executive pay?

Some of the concerns the Government has about Executive pay are bang on. Companies, particularly public ones, have a concept of reward that is very handy if you happen to be on the board.

They have a remuneration committee which is usually advised by some interested 3rd party like PWC or EY. They also have a Board of Directors and Non-Executive Directors who also are on other Boards. Hence they are recipients of bountiful goodwill from their fellow Men and Women.

In this situation, it makes perfect sense for Boards to effectively vote for large pay rises year on year, above inflation. After all, all boats will be floated.

Into this steps the Government, with a view that pay rises for Directors have gone too far and a list of some things that should be done:

  • Forcing companies to publish pay ratios that show the difference in earning between the chief executive and average employee
  • Improving the effectiveness of remuneration committees and the extent to which they must consult shareholders and the wider company on pay
  • Introducing binding votes on executive pay packages
Some of this is fairly anodyne, making shareholders vote etc. The piece that gets me is that why do they always pick on publically listed companies? Here, the Directors are under increasing regulatory burden and genuinely have more to lose than in the past. Even the coming reforms to Data Protection laws could see them face jail time for their companies mis-behaviour several rungs down the ladder.

It is all very well following the TUC and getting hot under the collar about Executive Pay. I spend a decent chunk of my week going to meetings in Mayfair. Their the average FTSE100 Directors salary gets paid to the junior people in the Hedge Funds. They walk around anonymously, in their chino's and polo necks, keeping their heads down.

I don't really care about them either. I am very relaxed with people earning money. Nearly everyone who earns decent money these days has to commit their entire life and being to it. Being a FTSE100 Director is totally all-consuming for the time that you do it, much like being a Government Minister.

Why is the Government so interested in their pay? I totally understand why the Government is worried about low pay - this is an issue for democracy, but selective worrying about high pay is just a left-wing whinge fest. I hope the Government are just virtue-signalling here and drop it thereafter.


roym said...

if austerity is to continue, then the 'workers v scroungers' game is done as its now the turn of the working poor to get hammered. suspect though as with workers on company boards its just a bit of noise to keep them at bay and will swiftly be dropped

Y Ddraig Goch said...

"Why does the Government care about Executive pay?"

Try plotting a graph of average executive pay over the last 10 or 20
years. Then superimpose a graph of any plausible measure of economic
activity - GDP, FTSE 100, inflation, average earnings - whatever. Of course, you already know what the result will be. The economic indicator will be a more-or-less straight line, ending at most a few 10s of percent higher at the right. The executive pay will be a hockey stick. Executive pay is provably unconnected to any notion of contribution, value-add or achievement. If it's OK for executives to pocket megabucks for literally no reason then why not everyone else?

"the average FTSE100 Directors salary gets paid to the junior people in the
Hedge Funds"

Is it trivially easy to prove that the junior Hedge Fund people are vastly overpaid compared to their achievements?

"Nearly everyone who earns decent money these days has to commit their entire
life and being to it."

This is straight out of Alan Sugar's boardroom. "I realise I contributed nothing to this task and added no discernible value, but I tried really, really hard." Lots of people work long hours yet somehow they don't get to regularly vote themselves lottery winning pay rises.

If an executive can demonstrate achievements consistent with their salary then yes, fine, good luck to them - we need as much of that as we can
get. Funny thing is though - they never do.

hovis said...

I second Y Ddraig Goch.

If Capitalism is about anything is is reward for risks taken. Executive pay and hedge fund salaries are in general not of that ilk. You are far too "relaxed" about what is as near as dammit a form of rent seeking.

AndrewZ said...

The government doesn't really care about executive pay. It merely sees an opportunity to increase its poll ratings by bashing some alleged "fat cats". It's all cynical politics.

hovis said...

'The government doesn't really care about [insert subject here].
It merely sees an opportunity to increase its poll ratings by bashing [insert subject here]. It's all cynical politics.'

Andrew: I fixed it for you - a quick summary of all Govt. policy especially from 1997:-)

DJK said...

Y Ddraig Goch is clearly right. If you want a neoliberal cloak to put over the government's concerns you can call it addressing a market failure, for that is exactly what it is.

Blue Eyes said...

It is an interesting issue. On the one hand, if firms overpay for staff they will be at a disadvantage to their competitors. If plenty of UK firms get it wrong then whole sectors may lose out to non-UK competition. So there might be a wider issue of UK competitiveness.

I am more concerned about the second order issues. There have been plenty of examples of public sector management demanding scandalous pay packages because they are doing similar roles to overpaid fatcats in the private sector.

If people are getting paid huge sums then failing and yet then moving on to better-paid jobs elsewhere it is a sign of market failure. That may indeed call for action, although I am not sure what exactly.

Anonymous said...

That is the problem. Something must be done, but everyone has a different idea as to what to do.

We are also seeing falling wages for some and rising wages for others. Could there possibly be a connection,.......

Diogenes said...

@I second Y Ddraig Goch

Nailed it. Capitalism as it is practiced today is no more than rent-seeking. Be it private (my house is now worth...) or public (stamp duty) then we all enjoy and benefit (if you are in the know) from a bit or arbitrage.

So should we legislate? Hell, no. Every bit of legislation creates arbitrage opportunities as the people selling tax-avoidance schemes will tell you.

What should we do about it? Two choices. Make a lot of noise about how it is unfair on the wealth creators. Or ..

Make a lot of noise about how it is unfair on the poor.

How you exploit this dichotomy is up to your own personal conscious.

CityUnslicker said...

I still am not convinced you have it right. Exec pay has increased far more in other countries than the Uk and there are plenty of examples of UK CEO's being poached to go abroad. US Salaries are stratospheric.

The one point made, about how they compare to any measure totally misses my key point. REGULATION AND RISK have materially increased, your train crashes and you may go to jail. This maybe right, but really, the risks are huge - lots to data show Non Exec roles go unfilled now as the risk/reward does not match up.

Also it is easy to say lots of people work hard, and that is to some extent true. I have direct experience from people who own say their own small business that is struggling to global CEO's. the latter's job is far harder than it used to be, much tougher mentally and physically than it used to be. This is simply the power of the internet, technology and communications kicking in.

So in sum, I am not convinced of this its so obviously market failure meme (on my comparisons to hedgies, I agree, facile in retrospect). This is all political triangulation of which I am not in favour if it achieves nothing.

Electro-Kevin said...

If an executive can prove that their honest (unsubsidised by the taxpayer) contribution resulted in accelerated profits then fine, they deserve their supercar and exotic holidays. If not...

Electro-Kevin said...

Why does the government care about executive pay ? Because the public voted Brexit and the BBC is diverting blame towards globalisation and not the EU - they say that The People voted Leave because they were pissed off with the the differential between the haves and have-nots.

Now view this in the context of a 'Brexit' Government which is trying to rebuild bridges between our people and the EU and not trying to leave it.

"The legalities are proving extremely difficult, the economy is going to crash, the pound has tanked, you're still all racists and your ideas caused the death of Jo Cox (though terror still has nothing to do with Islam) - we can't leave the single market and we can't stop mass immigration but we are going to take on the Execs (but not really)... so hush hush while we kick tin cans and deliver non-Brexit sometime never."

Electro-Kevin said...

The BBC are having it all ways. In once sense they are saying Brexit was a desire for socialism - so let's have it (executive pay)

At the same time they are saying Brexit means it's time to crush extremism (aka small 'c' conservatism.)

Electro-Kevin said...

Executive pay is a misguided sop to disappointed Brexiters - the Government is listening to the BBC more than it is the people.

(Sorry for multiple postings as I distill my thoughts.)

Blue Eyes said...

Democracy is a funny thing. In 2015 one thing we definitely rejected as a nation was Milibandism. May seems to think that the lesson from the referendum is that actually the voters secretly wanted Milibandism.

The government announced an action today in my field which seems to suggest that it has no intention to leave the EU in any meaningful way.

So in 2015 the voters secretly wanted Miliband. In 2016 we secretly want to stay in the EU.

If the UK does not actually leave, people might conclude that voting does not work.

andrew said...


Cheap political points are being made,
but it is also true that there is clear market failure.
a quick google gives
the economist and the LSE.
a quick google does not provide articles that say 'executive pay is proportional and reasonable'.

There is a difference between private and public companies.
If you own the company (i.e. it is private), it is yours and so is all the income to do as you will.
if you are a director of a public company, it belongs to the shareholders, not you.

There are many reasons for this failure - my favourites are
if two people are in front of a hiring committee
one says I cost £1m pa and will make about 30m pa profit
one says I cost £5m pa and will make about 50m pa profit
The money comes from the company, not the hiring committee.

certerus paribus, a rational person chooses the most expensive one.

if the cleaners had their pay set by other cleaners who work elsewhere, independantly, with appropriate assistance from external benchmarking set by other independant cleaners, do you not think their pay would rise in the same way?


In other words human nature tends to go for the more expensive option, you tend to value that which you know and understand more (and cleaners less) and external restraints either do not exist (anymore) or have failed.
(one of the external constraints was the social cohesion brought with WW2 imo)

It is increasingly clear that some plcs are being run for the directors rather than the owners (google value creation plan or vcp).

Where there is market failure and a lack of accounting for externalities, this is where a govt should step in.

As with all these things, there is also a moral dimension.
Some people (lefty virtue signallers, g. brown) do think that your money is not really yours and so they should have a say in the distribution.
Others (well, me) think your money is yours but you have a duty to pay some of it over to stop others going cold/hungry and help when they are ill and all those things that make the UK a nice place.

Going in a sort of circle this is why I completely agree that something needs to be done in respect of public companies and directors pay.

The directors and the structures around them are conspiring/colluding/unconsciously doing the same thing as some posters here (quite rightly imo) attack lefty virtue signallers / marxists for

- they think that the money produced by the company does not really belong to the shareholders, and they should have a say in the distribution.

andrew said...

oops, meant to say CU, ...

Electro-Kevin said...

Ostensibly this is to deal with Philip Greens - but the problem with Green was not the disparity in top pay, it was that he closed down a company and pensioners lost their pensions.

The more I think about it the more it seems Brexit is being turned into a socialist rebellion. "What the people want is more socialism"

The total reverse of the truth. We want conservatism with a small 'c' and when you continually deny us it you get Trump/Farage and when that fails...

CityUnslicker said...

Andrew I don't agree re cleaners, many people are harder judges in my experience and will go for the cheap option. I am always surprised how tough people can be in their decision making - lefties aside.

Another downside not being examined here is the negative externality of controlling PLC pay. Far fewer companies will become PLC's under this regime making far more open to Philip Green type behaviour.

andrew said...


cleaners may be a bad choice as they are a cost and so that is what you look at to minimis and that is their salaries, whereas in a CEO you are looking at added value and maximising that.

I see no great advantage to being a PLC from the company owners point of view (otherwise private equity would not be a thing).

PG is easily dislikeable, but whilst he does not have completely clean hands, no-one has seriously stated that he broke any laws.
What laws should there have been in place for him to break?

(other than being v.v dislikeable and walking away from a situation where things were probably going south and did so some years later and he lives on a v.v. big yacht in a sunny place and the employees live in small terraced houses up north where it is dark and rains all the time and it looks like their pensions will be reduced because interest rates have collapsed)

Suff said...

As you point out we need less government intervention. It's their interventions that have essentially closed down the free market. Over regulation and subsidies (to those paying the big backhanders)have closed out access for the SMEs. With no true competition in the market the large existing corperations are left to play silly buggers. Why invest billions in the next generation widget, when the public only have a choice of your product and if they don't want it, bung an MP a few million to make legislation so they have to buy it.
With the competition closed out their only job is to respond to the shortermism of the market. Gone are the long term buy and hold private investor. There's nothing written into an HFT algorithm about the responsibility to the company pension holders and they certainly don't care whether the company is still in existence for its next share holder meeting.
So first order of the day is for the government to get the hell out of the way and let the free market do its stuff. We would soon see who is worth their money running a competitive business.

andrew said...


The trouble is with humans

If you own 100% of something, and that is most of your capital, you look after it (generally) - and this is closer to the 'old' model of share ownership you mentioned.

If you own 0.0001% of something, and that is 0.01% of your capital, you look at the share price once a week (generally).
If you are in a tracker fund, this goes doubly.
You will probably not be aware that the board are running the company for their benefit, if you were, nothing you can do.
This is a market failure, and this is what regulation is for.
(Not saying the current regs are any good/useful).