Three rules to put right the wrongs of executive pay

s the Shareholder Spring of 2016 intensifies, so the number of companies locking horns with institutional shareholders only grows. First it was Bob Dudley of BP. Then it was Iain Conn of Centrica. Next it was Michael Roney of Bunzl. And yesterday it was the turn of Mark Cutifani of Anglo-American to join the ranks of FTSE 100 chief executives whose investors are less than happy about the pay and shares packages they received for last year.

To the external observer, the sums being paid to these men could be perceived to be gargantuan. To those working in the top flight of these companies, and indeed the men receiving these payments, they are likely to be perceived as richly deserved. The truth probably lies somewhere in the middle. But putting to one side the debate of whether any one individual is worth £70m – the sum Sir Martin Sorrell is expected to receive for 2015 – there are a number of issues at work here leading to continued dislocations between the various participants involved with executive compensation.

The issue is one that Nigel Wilson, chief executive of Legal & General, has studied in great detail to produce his interim report on executive pay for the Investment Association, which we detail the findings of today.

Wilson, working with others including Newton chief Helena Morrissey and J Sainsbury chairman David Tyler, found that despite the FTSE trading at roughly the same level it was 18 years ago, executive pay has more than trebled over that time. His group found that the current approach is “not fit for purpose” despite “several attempts at reform”. Many of Wilson’s points are laudable, and the work he is doing in this area should be commended, in the hope of ensuring such fracas do not recur in future years. But for that to happen, to my mind, three things need to take place.

One, companies need to stop using so-called executive compensation “experts” to work out how much to pay their executives. The role of such individuals is to look at how a chief executive is being rewarded, and assess whether they are being fairly compensated. In doing so, they look to rival executives carrying out similar roles in comparable companies.

But this process of so-called “benchmarking” simply acts to inflate the levels of pay and reward offered to executives, by creating ever increasing levels of remuneration. Such experts sell themselves to a company’s remuneration committee by intimating that without them, executives will feel under-valued and may be easy pickings for rivals willing to pay more.

Arguments like this only go so far, however, given chief executives are driven by much more than money alone. Wilson and Co rightly point out in their 13-page dossier that pay consultants reduce accountability and create outcomes that are not wanted. I couldn’t agree more. They prey on remuneration committee chairman, who often have no experience in this role, by scaring them into submission. What is more, the number of such consultants is relatively small compared with the number of companies they service, meaning the same practices are repeated over and over.

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