Friday 27 January 2017 5:30 am | Updated: Tuesday 27 July 2021 12:55 pm

Will Imperial Brands light up another shareholder spring? Let’s hope not

The reaction to tobacco giant Imperial Brands’ decision to jettison a new incentive package for chief executive Alison Cooper has been tediously predictable.

Focusing on the level of her pay – which will now not rise to a potential £8.5m this year – it is being portrayed as a turning point, spurred on by Theresa May’s campaign against corporate excess. The only way for executive pay, we are told, is down. If a multinational like Imperial doesn’t need to pay top dollar to retain the best staff, obviously other companies don’t need to either.

This is an intellectual cul de sac that only fans ill-informed public anger at how big companies are run.

The comparisons we regularly hear about how the pay of chief executives relates to bosses of the past, to the average worker in their company, or to chief executives of other companies are rarely useful. Not only is the average company much larger today than it was 20 years ago (a good chief executive can add much more value), but what really matters is how that chief executive is paid – is his or her pay package aligned with the company’s performance over the long term?

There are complicated arguments about how to achieve this. Should chief executives be paid in debt or equity? Should any equity given as part of a remuneration package vest over a short period (two to three years) or a longer one (five to 10 years)?

But it is wrong to assert that incentives don’t matter, or that the problem is one of chief executives being paid too much. According to studies cited by London Business School professor Alex Edmans, the stock prices of companies run by chief executives with high stock ownership outperform those with low share ownership by 4 to 10 per cent per year, for example.

It may be the case that shareholders thought Cooper was already sufficiently incentivised, but that is a matter for those investors and is itself evidence that they are more than capable of influencing how their companies are run without government intervention.

But a new broad-brush shareholder spring, in which anti-inequality activists attack companies on the shallow basis that their leaders are paid “too much”, would not be wise.