His predecessor, Sir Richard Greenbury, left the post a deeply disillusioned man, believing that any attempt to enhance understanding and disclosure of executive pay was doomed to failure. Sir Ronald is a realist and shares some of those sentiments; he is not optimistic that anything he does will improve either media understanding of boardroom pay or sensitivity among industrialists to public opinion on these matters. But he believes strongly there is still a task to be done and someone's got to do it. So is he on a hiding to nothing, or can he still make a worthwhile contribution to the debate?
There were two stories in the press this week which highlight the nature of the problem. The first was one that appeared on these pages suggesting that Sir Iain Vallance and Sir Peter Bonfield, chairman and chief executive respectively of British Telecom, were in line for bonuses of pounds 500,000 apiece after an "outstanding" year in the company's affairs. This was one of those stories which, though largely right at the time it was written, later turned out to be wrong, at least in part. Certainly there are forces on the BT board, and on its remuneration committee, that believe the two knighted industrialists should be paid bonuses of this size and but for pre-emptive action by Sir Iain, he might have been offered one.
Documents sent to BT shareholders yesterday in connection with the merger with MCI of the US note that the remuneration committee has agreed to consider paying a "discretionary" bonus of unspecified quantity. Under the old system this could have been anything up to 50 per cent of salary, or around pounds 250,000. However, there were moves to lift this ceiling so as to allow the payment of half a million pounds.
Not any longer, for in a letter to the Independent, Sir Iain has said that even if offered a bonus of this size, he would not accept it. I'm not sure I would have done this had I been in Sir Iain's shoes and it is a measure of how sensitive he is to these issues that he has. Sir Iain is that rare commodity, an outstanding industrialist who doesn't appear to be motivated by money, or if he is, he certainly hides it well. After an initial run-in over pay in his first year as chairman of BT, Sir Iain has handled the issue of "fat cat" pay with skill and not a little personal sacrifice. His remuneration has always been reasonable but never excessive for someone of his position.
When the size of the bonus has looked like changing that perception, he has managed to defuse the row by giving away large chunks of it to charity. His letter to the Independent is typical of the approach. By adeptly managing to sidestep the privatised utility "fat cat" row, he has done both his company and his shareholders a great service. Unlike British Gas, the company is still intact and going from strength to strength. The politicians and regulators have been deprived of the ammunition needed to meddle and shareholders can boast a company of truly world-class status. Who knows? They might even avoid Labour's windfall profits tax. Sir Iain almost deserves a bonus for it.
Ironically it will be successors who reap the benefits, for the documents filed in connection with the MCI takeover reveal that the policy of restraint is changing. Sir Peter Bonfield will get up to 125,137 free shares in respect of last year under a long-term incentive plan. Admittedly he won't be able to draw on those shares for five years, but provided he stays around, he's banked the equivalent of pounds 500,000 at today's share price. Robert Brace, the finance director, stands to get even more, and this is on top of basic salary and the annual bonus.
This, however, is nothing compared with what MCI directors and senior executives will get under the terms of the merger with BT. With the MCI people, BT has been forced to agree American-style incentives, enriching their beneficiaries beyond the dreams of avarice. As BT moves from being just another privatised utility to the status of leading global communications company, the American remuneration packages will migrate, rather in the way they did when Beecham merged with SmithKline of the US.
The second story concerns British Petroleum, where a long-term performance plan similar to that put in place for Sir Peter Bonfield has been extended to more than 300 senior executives in the group. In total some pounds 32m of free shares are being paid out under a scheme originally set up in 1990. As a consequence, John Browne, the chief executive, sees his pay for last year rise from pounds 635,000 to pounds 2.47m, while the pay of Sir David Simon, the chairman, rises from pounds 121,000 to pounds 1.12m. In both cases the hike is caused by the free shares. The interesting thing about BP's pay bonanza is that it is somehow made to seem justifiable, not just because an astonishing turnround in BP's performance has been achieved in the past five years, but also because it has been spread among so many people. This is a clever trick, from which others will no doubt learn.
In the end, however, the issue of whether these very high rates of pay are deserved is a largely irrelevant one. The bidding up of executive salaries is a global phenomenon. Those who attempt to buck the trend will simply find they lose their best people to those who don't. Nor can the problem be properly addressed through taxation; high top rates of tax would almost certainly stifle entrepreneurial innovation and drive the best people offshore.
The worst mistake, then, that Sir Ronald could make in thinking about how he is going to follow Greenbury is to believe there is anything that can actually be done about rapidly inflating executive pay. Greed is like the sun and the rain; it is part of the human condition and part of the price we pay for a free market economy. In any case, the very high pay of top earners is not the main problem here; the more worrying phenomenon is the polarisation of pay between the well paid and the low paid, between the skilled and the unskilled. In an increasingly global, free trade economy, that too is something for which there are no obvious remedies.
So it looks as if Sir Ronald is going to have to content himself with merely enhancing disclosure and transparency in executive pay. Whatever he does, executives are going to find ways of continuing to pay themselves more and more. The best he can hope for is to improve disclosure to a level that adequately exposes those who obviously don't deserve it. As for how he persuades the public that it is entirely reasonable for executives to be bidding up their market worth in this way, if I had the answer to that, then I too would be an extremely wealthy man.Reuse content