It may take legislation to restore sanity to executive remuneration

Outlook

A third of investors at the insurer RSA’s annual meeting refused to back the pay plan for its chief executive, the former Royal Bank of Scotland CEO Stephen Hester (EPA)

It has become something of an article of faith in corporate Britain that executives should be paid in shares as much as is possible.

This, it is held, aligns their interests with their investors’. Au contraire, says the High Pay Centre. It wants to give them the cash.

No, I haven’t utterly misread its report on executive pay. That recommendation applies only to annual bonuses – which are increasingly paid at least partly in shares.

The entirely share-based long-term incentive plans (L-tips)? These it wants to see scrapped, which might have a very meaningful impact on the quantum of bosses’ pay, given that they usually make up the largest part.

That particular conclusion may not come as any great surprise, given where the report is coming from.

But what’s really interesting are some of the names that are attached to the report. They include Simon Walker and Roger Barker, from the Institute of Directors, and Ruth Bender from Cranfield University, a post-graduate institution that has trained some of this country’s leading managers. Then there is Duncan Brown, who formerly worked in rewards consultancy with Aon Hewitt. The report was funded by Lord Sainsbury.

Needless to say, that lot could hardly be characterised as a band of fiery left-wingers seeking to capitalise on some alleged “politics of envy”.

They see a problem that appears to have passed too many institutional shareholders by. The current set up is damaging to their interests. It is damaging to business more generally, and its reputation with the wider public. And it doesn’t do much for the health of the corporations that pay out such divisive sums.

The report cites good evidence for this – such as the fact that most L-tips have conditions attached. Now you would expect someone hoping to receive a multi-million pound bung to at least meet some target or other before getting their hands on it.

The problem is that the vast majority of these targets are flawed. But with so much money linked to them, executives almost inevitably work to them rather in the wider interests of the businesses they run.

It is shareholders who ought to hold the key to changing this unhappy situation, and yet despite strong evidence that modern remuneration policies are damaging to their interests – with this report adding to the weight of it – they have chosen to sit on their hands.

It still comes as a surprise to see remuneration reports being voted down, even though such votes have only an advisory capacity. Votes on remuneration policy (on which Vince Cable gave shareholders a three-yearly binding poll) have real clout, but dissent on these is rarer still.

The big City institutions are failing their clients in this sphere. Some of those who contributed to this report might find it uncomfortable, but it may take legislation to force people to take the issue more seriously.