Anthony Hilton: At last – shareholders are starting to turn up the heat over executive pay

The big question of course is what happens if boards don’t respond as they should

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The Independent Online

This should go down as the week when shareholders finally lost patience with companies about executive pay. Hermes, the manager of the British Telecom pension fund and one of the largest share-owning organisations in the country, held a joint press conference with the National Association of Pension Funds on Tuesday to announce that a few weeks previously, about 40 of the latter's members had met with a similar number of FTSE companies. The funds delivered a document from Hermes outlining its proposals for pay reform which in parts read more like an ultimatum.

"We are at a turning point in the evolution of publicly listed companies in the UK," it said... "The directors of corporate Britain need to reflect deeply on the culture of boards and the companies they lead. The ultimate success of companies and our economic future will be influenced by boards and their remuneration committees seeking honestly to address the flaws in much of the remuneration that is paid to the directors of public companies..."

The basic idea of a raft of reforms is to make companies think long term again and focus on what is needed to deliver prosperity to the business rather than, as too often happens, prosperity simply for the directors. Its most telling line refers to the increasing body of academic research which suggests – heresy of heresies – that performance pay does not work and executive bonuses are almost universally bad news.

Apparently, studies have shown that when people are doing manual, repetitive tasks, the prospect of a bonus improves performance, but in intellectual jobs bonuses seem to inhibit performance and the more demanding the intellectual challenge the more damaging it is to have a bonus dangling in the background.

This drives a coach and horses through the whole nonsense of paying someone to do a job and then paying them a bonus for doing it properly, and it is a shame Hermes did not make more of it.

Instead it confined itself to the comment "We note that there are many studies... that demonstrate that pay for performance is not always the best motivator, particularly for those in senior positions and we expect boards to ensure that they take account of this."

The big question of course is what happens if boards don't respond as they should and what are the shareholders going to do about it.

But that is an issue for another day. For now, let us be grateful that at last they are making an effort to bring executive pay under control.