Most of it is fair comment. Few boards of directors adequately explain their pay policy, if they have one at all. Judging from research by PA Consulting Group, many of those that do have a policy have chosen the wrong one.
Most companies think they should pay top managers salaries above the median, and very often in the top quartile, measured against other companies. 'We pay the best and we get the best' is the general idea. The logic, however, appears flawed on at least two counts.
First, a PA survey of the 400 largest companies found those that aimed simply at paying above median salaries tended to be significantly worse performers than those that paid below. Performance was measured by total return to shareholders over five years.
Guess who had the best results? The companies that paid low base salaries and high bonuses, a form of remuneration that has become particularly unpopular in some quarters lately as the scale of last year's City rewards has emerged.
Firms that paid below median basic salaries and above median bonuses averaged 17 per cent compound annual return to shareholders. Those with high basic salaries and low bonuses averaged 4 per cent. There is a message there.
The second drawback to paying high basic salaries is better known. If everyone has a policy of paying above the median to gain top performance, the median rises.
Jon Moynihan, who runs PA Consulting, thinks bonuses are a good thing, but only if there is a strong link to producing value for shareholders. But he says few senior management pay schemes in the UK make that link.
It is a simple idea based on the belief, confirmed by the survey, that the companies that do best are the ones where executives' interests are aligned with those of their shareholders, so they think and act as owners and not as time-serving employees with fat perks unrelated to performance.
This is, however, rather hard to put into practice. Here are a few sensible guidelines from Mr Moynihan:
Top managers should own a large number of shares, through purchase or by earning them, not as a gift. Bonuses should be paid only when wealth is created for shareholders. At least part of a bonus must be in company shares.
There should be a golden handcuff on the shares, so their value can only be realised by staying for a realistic time. Managers must agree that their own wealth is to be created over a realistic number of years, not all at once. (John Cahill's pounds 3m in a couple of years at British Aerospace is not the way to do it.)
Guidelines like these would not prevent ridiculously high pay or pay rises, but at least shareholders would be able to determine how managements are paying themselves and whether this is honest and consistent.Reuse content