Time to root out fake facts on boards and pay
REWARDS for failure are bad; rewards for doing well are good. That is one of this newspaper’s guiding principals; as I argued in this space yesterday, the Prime Minister is right to be giving more powers to shareholders to make sure they exercise closer control over boards. It is wrong and indefensible for CEOs who bankrupt their company to walk away with a large payout – they should be fired with no payoff. Rewards for failure must end – but at the same time it is right that successful, hard-working wealth creators be handsomely rewarded when they deliver the goods for their owners. This debate ought to be about making capitalism work better, not about returning to some intellectually bankrupt egalitarian dystopia and embracing permanent stagnation.
So it is vital that the public be informed of the proper facts about City pay structures and corporate governance so that they can understand which reforms are needed and which are not. Take the idea – regularly peddled by David Cameron, Vince Cable and Nick Clegg – that executives routinely sit on each other’s boards and remuneration committees and hand each other massive annual pay hikes. This is an insidious myth, as Manifest, a corporate governance group, has brilliantly revealed.
First, take the overlap between different boards. Of the 1,005 directors in 97 FTSE 100 companies surveyed, 88 per cent hold just one FTSE 100 directorship, 10 per cent hold two and just 2 per cent hold three or four. Just 5 per cent of FTSE 100 executive directors also serve as a non-executive on the board of another FTSE 100. In not a single one of these is the favour returned. There is just one case of an exec serving on the board of another firm of which a non-exec in turn serves on the former’s board. Just 20 current executive directors of FTSE 100 firms sit on the remuneration committees of 18 other FTSE 100 firms and thus help influence pay. To sum up: the cross-overs between boards are small; they are utterly insignificant when it comes to remuneration committees. In this instance at least, the idea that cronyism dominates boardrooms is worthless, factless nonsense.
Second, take total CEO pay in listed companies. The best measure of these things is to examine median (not mean) total compensation. It is also vital to understand that performance pay is backward looking: pay rises handed out in 2011 cannot be compared to earnings or share rises for 2011 but for the previous financial year. This ought to be obvious but sadly isn’t. The latest Manifest/MM&K survey shows that Aim CEO total remuneration awarded rose by 4 per cent in 2010-11; small cap CEOs by 14 per cent, FTSE 250 CEOs by 12 per cent and FTSE 100 CEOs by 12 per cent. The previous year they were up by 4 per cent for Aim, down 7 per cent for small caps and up 6 per cent for FTSE 250 and FTSE 100 firms.
Total remuneration realised by FTSE 100 CEOs grew by a median of 14 per cent, driven by long-term incentive plans that vested in the year and options. Bonuses were up 13 per cent, triggered by FTSE 100 earnings per share rising 39 per cent and the FTSE 100 rising by 9 per cent in 2010. Far from these increases bearing no relation to performance, they were due to plans paying out when performance improved, not to boards randomly “increasing pay”. Manifest believes that the evidence shows that the system has become much more efficient and responsive over the past three years. If this is right, the next batch of figures will show that remuneration slowed substantially as the FTSE stagnated in 2011 and earnings growth slowed. We shall soon find out.
This doesn’t mean the system is perfect; far from it. It needs further reforms. Compensation doesn’t fall enough in bad years. There are still too many massive payoffs for failure, which is never excusable and is probably the single worst problem. The FTSE 100 has not increased over the past 12 years though CEO pay has quadrupled. There are some decent reasons for some of that – many firms now in the FTSE weren’t there 12 years ago, so the figures are not comparable; p/e ratios are more sensible today – but bubble-era inflation also played a role in pay. It is right that shareholders are being given more powers; reforms should go even further to empower them. But the present hysteria and misuse or downright distortion of statistics must end.
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