Dominic Lawson: Private companies' pay is up to them

Unless what top directors receive is gargantuan, it will not be more than a tiny percentage of the company's income

Share

The front-page headline in yesterday's Independent was definitive – "Cable: I'll force fat cats to justify bonuses." The Guardian's splash was equally conclusive, though it took a slightly different angle – "Cable: workers will have a say on bosses' pay."

Well, it is usual with ministerial speeches at party conferences for newspapers to be spun the key statements in advance, and in a way judged to hit the soft spot of the readers. Given that purchasers of The Independent and The Guardian are assumed to be particularly offended by "excessive pay", this was for them.

As is also usual, however, the spin is more vigorous than the content. What the Business Secretary, Vince Cable, has actually done is to publish, in the words of his department, "A discussion paper [which] looks at the issues surrounding executive compensation. It puts forward wide-ranging proposals on how to link executive payment more closely to company performance and invites feedback and further evidence that will help build a stronger understanding of the issues." Hold the back page!

This document makes absolutely no definitive policy suggestions. It discusses such remedies as giving shareholders a veto on executive remuneration packages, or appointing a member of the workforce to boards' remuneration committees – but is studiously non-committal, offering arguments both for and against such proposals.

Admittedly, the foreword by Cable has a bit of political muscle: "Generous rewards are justified where a company has shown strong long-term performance. However, over the past 10 years the link between median CEO pay and performance of the FTSE 100 has been hard to discern. Although concerns about executive pay are not new, the recent financial crisis has made shareholders, the public and Government more acutely aware of the issue."

I'll say. And he's right that this is not new. In my cuttings book there is a foxed copy of a 1989 article I wrote for The Spectator entitled "How the Bosses Help Themselves". It began: "The nation's salaried employees share a common fear: how can they avoid a drop in their standard of living? For many of them the answer, increasingly, is industrial action: a hazardous and often self-defeating response. For a select group of employees, though, the last few years have yielded pay rises which have protected them ... They are Britain's company directors."

The methods identified in that article are the same as today's: remuneration committees whose non-executive members have a personal vested interest in boosting the pay of chief executives generally; and the hiring of remuneration "consultants" who themselves have an interest in coming up with proposals that will gratify the board that has appointed them.

Cable, rightly, identifies shareholders rather than the Government as the proper agent for invigilating such abuses. It is none of the business of politicians to instruct privately owned firms as to what they pay their employees – at all levels. Government pay policies, as this country discovered during the 1970s, are a disaster, however politically appealing they might seem in the short term.

Shareholders in large publicly quoted companies, however, while concerned about the businesses' wage bill as a whole, are not that exercised about what a handful of top directors get. Unless the figure is truly gargantuan, it will not amount to more than a tiny percentage of the income of the company. As I wrote 22 years ago: "If a company earning £1bn a year increases board pay from £3m to £6m, the shareholders will not feel a thing. The same principle ensures that grand-scale embezzlement can be concealed for long only in grand-scale companies".

For an up-to-the-minute illustration of this, we need only observe that Kweku Adoboli, the so-called rogue trader at the Swiss banking behemoth UBS, managed, it is alleged, to blow £1.5bn by unauthorised trading undetected for fully three years.

In this particular case, the losses will be absorbed in appropriate fashion. UBS says that none of its account-holders will be affected and that the losses will be borne by shareholders and by Mr Adoboli's 65,000 colleagues, who may well not see any bonuses at all this year. Similarly, if a company, by overpaying an ineffective chief executive – or "rewarding failure", as Dr Cable predictably puts it – does less well than other rival businesses, then its shareholders, and not the public as a whole, are the losers. Ditto if the company goes bankrupt and its assets are reallocated among better-managed firms.

However, Dr Cable's reference to the "financial crisis" touches on the most critical point, economically and politically. What if the company is not allowed to go bankrupt? What if it is a big bank, whose disappearance is judged to risk a collapse of the financial system as a whole? If the normal free-market arguments do not apply, then neither does the principle that overpayment, however ugly, is a purely private concern. If the taxpayer is effectively guaranteeing the business, then the taxpayer (represented by the politicians) has a right to interfere.

This lies behind the Government's commissioning of the Independent Banking Commission, which last week recommended that "universal" banks should not be allowed to funnel cash from their high-street wings to their higher-risk trading businesses. Since it is only the retail banking operations that the state wants to guarantee, this is a way of telling the banks that they will no longer be able to use ordinary depositors' money as the backing for their hedge-fund type businesses, which means that the taxpayer will no longer be underwriting the risks – and salaries-– of their colossally remunerated trading teams.

Whether this will be sufficient to ensure a necessary degree of prudence on the part of the banks is far from clear. It might make them less gung-ho, which would no bad thing; but I doubt that will have a direct effect on pay levels within their businesses. They will continue to be able to rely on the shareholders to support a business model in which at least half the profits go to employees – or at least until a big bank decides to offer its traders much less and pay higher dividends instead. I've never quite understood why such firms can't find lots of bright number-crunchers from India or China to make this happen – and perhaps one day they will.

Dr Cable could always suggest the repeal of the Banking Co-Partnership Act of 1826, which allowed independent banks throughout the UK to become joint-stock companies – that is, to be funded by outside shareholders rather than just their own partners. I'm sure that if bankers were once again subject to unlimited personal liability, they would be much more cautious about what they paid themselves.

On the other hand, they would also be much more cautious in their lending; and if there's one thing that the public seem to hate more than overpaid bankers, it's bankers who say no to demands for credit. So it's back to the drawing board, Dr Cable.





d.lawson@independent.co.uk

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
iJobs Job Widget
iJobs General

Recruitment Genius: Project Assistant

£17000 per annum: Recruitment Genius: They are a leading company in the field ...

Recruitment Genius: DBA Developer - SQL Server

£30000 - £35000 per annum: Recruitment Genius: This is an exciting opportunity...

Recruitment Genius: Office Manager

£26041 - £34876 per annum: Recruitment Genius: There has never been a more exc...

Recruitment Genius: Travel Customer Service and Experience Manager

£14000 - £17000 per annum: Recruitment Genius: The fastest growing travel comp...

Day In a Page

Read Next
A pack of seagulls squabble over discarded food left on the beach at St Ives on July 28, 2015  

Number of urban seagulls in Britain nearly quadruples: Hide food and avoid chicks to stay in gulls’ good books

Tom Bawden
 

Blairites be warned, this could be the moment Labour turns into Syriza

Andrew Grice
Blairites be warned, this could be the moment Labour turns into Syriza

Andrew Grice: Inside Westminster

Blairites be warned, this could be the moment Labour turns into Syriza
HMS Victory: The mystery of Britain's worst naval disaster is finally solved - 271 years later

The mystery of Britain's worst naval disaster is finally solved - 271 years later

Exclusive: David Keys reveals the research that finally explains why HMS Victory went down with the loss of 1,100 lives
Survivors of the Nagasaki atomic bomb attack: Japan must not abandon its post-war pacifism

'I saw people so injured you couldn't tell if they were dead or alive'

Nagasaki survivors on why Japan must not abandon its post-war pacifism
Jon Stewart: The voice of Democrats who felt Obama had failed to deliver on his 'Yes We Can' slogan, and the voter he tried hardest to keep onside

The voter Obama tried hardest to keep onside

Outgoing The Daily Show host, Jon Stewart, became the voice of Democrats who felt the President had failed to deliver on his ‘Yes We Can’ slogan. Tim Walker charts the ups and downs of their 10-year relationship on screen
RuPaul interview: The drag star on being inspired by Bowie, never fitting in, and saying the first thing that comes into your head

RuPaul interview

The drag star on being inspired by Bowie, never fitting in, and saying the first thing that comes into your head
Secrets of comedy couples: What's it like when both you and your partner are stand-ups?

Secrets of comedy couples

What's it like when both you and your partner are stand-ups?
Satya Nadella: As Windows 10 is launched can he return Microsoft to its former glory?

Satya Nadella: The man to clean up for Windows?

While Microsoft's founders spend their billions, the once-invincible tech company's new boss is trying to save it
The best swimwear for men: From trunks to shorts, make a splash this summer

The best swimwear for men

From trunks to shorts, make a splash this summer
Mark Hix recipes: Our chef tries his hand at a spot of summer foraging

Mark Hix goes summer foraging

 A dinner party doesn't have to mean a trip to the supermarket
Ashes 2015: With an audacious flourish, home hero Ian Bell ends all debate

With an audacious flourish, the home hero ends all debate

Ian Bell advances to Trent Bridge next week almost as undroppable as Alastair Cook and Joe Root, a cornerstone of England's new thinking, says Kevin Garside
Aaron Ramsey interview: Wales midfielder determined to be centre of attention for Arsenal this season

Aaron Ramsey interview

Wales midfielder determined to be centre of attention for Arsenal this season
Community Shield: Arsene Wenger needs to strike first blow in rivalry with Jose Mourinho

Community Shield gives Wenger chance to strike first blow in rivalry with Mourinho

As long as the Arsenal manager's run of games without a win over his Chelsea counterpart continues it will continue to dominate the narrative around the two men
The unlikely rise of AFC Bournemouth - and what it says about English life

Unlikely rise of AFC Bournemouth

Bournemouth’s elevation to football’s top tier is one of the most improbable of recent times. But it’s illustrative of deeper and wider changes in English life
A Very British Coup, part two: New novel in pipeline as Jeremy Corbyn's rise inspires sequel

A Very British Coup, part two

New novel in pipeline as Jeremy Corbyn's rise inspires sequel
Philae lander data show comets could have brought 'building blocks of life' to Earth

Philae lander data show comets could have brought 'building blocks of life' to Earth

Icy dust layer holds organic compounds similar to those found in living organisms