On the latest data, the pay of FTSE-100 CEOs has fallen slightly. A report from the CIPD and High Pay Centre notes that the average pay has fallen from £3.9 million to £3.5 million for the year in 2018 (the latest for which figures are available).
Business Secretary Andrea Leadsom said “Today’s figures will be eye-watering for the vast majority of hard-working people across the UK. The numbers are better than they were….but the situation is still concerning, especially in those cases where executives have been rewarded despite failing their employees and customers”.
To remind readers, there is no evidence that high pay of executives results in improved performance of companies according to academic research. Highly paid CEOs pay themselves large amounts because a) they can do so; b) remuneration committees are poodles and rarely confront the issue because it is not in their interests to do so; c) shareholders, particularly institutional ones, have no incentive to challenge excessive pay.
Instituting votes on pay and other measures have not really changed the underlying problems. For example, LTIPs which were originally promoted as a way to align directors interests with shareholders, but were in reality a way around tough US pay regulations, have led to a rapid escalation of pay and we still see LTIPs that pay out bonuses of 200% of base salary and more, on top of other short term cash bonuses. Incentive schemes that pay out multiples of base salary are actually just lotteries with no rational basis other than an easy way to ramp up total pay on dubious grounds. In my view the only way to control pay is to have regulations that limit total bonuses to a fixed and low percentage of salary – 50% would be about right for maximum performance. And most of it should be paid in shares not cash.
That might sound draconian, but it would reinstate what a bonus should be – an extra award for recognition of outstanding performance and the ability of a company to pay more, even though executives are expected to do their best anyway for which they get paid a salary. Calling such bonuses “incentive” payments is simply wrong – there is no evidence at all that they incentivise higher performance.
Excessive rewards in the financial sector also extend to fund managers. The latest example is that Neil Woodford and his partner Craig Newman shared £14 million in dividends from Woodford Investment Management in the year ending March 2019. The pair took out £112 million since the Woodford Equity Income Fund was launched. These are the rewards for building investment funds that were a major failure. Soon after March 2019 the Equity Income Fund was closed to withdrawals and the Investment Management company is now being closed down.
Rewards to fund managers bear little relation to the work put in or the success of their activities. Star fund managers with great reputations, as Woodford once was, can collect large amounts of assets under management and the fixed percentage fee basis for funds, that does not shrink as the size of the fund grows as it should, can result in obscene amounts of pay. Terry Smith of Fundsmith is another example, although investors in that fund are probably satisfied with his performance. Perhaps a claw-back mechanism for underperforming funds is the answer?
The author is invested in Fundsmith, but has no financial interest in the Woodford funds.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )