Submitted by Jennifer Spivey on 17-02-2012

Excessive corporate pay is a story that continues to gather momentum, and with bonus season upon us, public outrage is sure to be heard shortly across the country. And the pressure is working - Stephen Hester gave up his bonus (despite the previous government agreeing to it), but if we continue in this vein, with Government pressure to implement stricter rules surrounding how the largest companies in the private sector reward performance, will it really make for a happy ending? 

With the current economic climate causing continued financial strain on households, and following the public bailout of one of the UK’s largest financial institutions, the Government are receiving more pressure than ever to be seen to be reigning in executive pay. Last month Business Secretary Vince Cable said that shareholders should be given a binding vote over how large British companies manage executive pay and who should be recruited on boards.  As is the case with most inward looking policies, within a globally functioning economy, this approach is fundamentally flawed.

Giving power to shareholders, whilst a good idea, will likely not make much difference.  Getting and keeping good bosses should matter more to a company’s owners than how much they are paid. It is also detrimental to business to enforce rules on board composition – typically businesses should know who is best qualified to serve. Some shareholders, particularly activist ones, often have short term horizons so may vote for board members who best serve the interests of a minority of shareholders rather than the majority. Clearly this is detrimental to the long term performance of a company.

Boards are competing within a global talent pool and need to pay competitive market rates. How much a company returns to shareholders, alongside long term performance measures and market forces, should be the determining factors in how much executives get paid. It would be damaging to the economy if companies were forced to adhere to political forces rather than economic ones.

London’s stock market is made up of some of the world’s largest companies, and so pay levels will necessarily rise because of globalisation and not weak governance. Top executive jobs entail great risks which should include appropriate rewards. Short and long term performance must be balanced, with a greater share of pay being tied to longer term results, as in America. Executives tend to be internationally mobile, and so the Government would do well to be on the side of the UK’s global position as one of the most attractive market places for talent.

Excessive political meddling in how companies should be run risks a return to elements of a state dominated model. This did not work in the 70’s and will undermine the UK’s position as an attractive place for companies to list and talented executives to live in. While excessive and unjustified (by results) pay should be discouraged, the reality is that top performance requires top management, which requires a market rate. The old adage “you pay peanuts and you get monkeys” is still apt.