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Why business needs to get its house in order over bosses pay

Monday 12 June 2017 12:33 BST
The behaviour of business leaders when it comes to pay is stripping them of any moral authority
The behaviour of business leaders when it comes to pay is stripping them of any moral authority (Alamy)

How will remuneration committees respond to the current economic and political uncertainty?

If the past is any guide, they'll carry on regardless and pay up.

In past epochs when the economy has trended downwards, as it is currently doing, rem committees have indulged in various wheezes to keep their CEOs in the style to which they have become accustomed.

Share options have been re-priced, bonus criteria tweaked to ensure they get paid. Rises to basic pay often look modest, but the devil is typically in the detail. You can hand an executive a substantial increase by boosting what has become known as the “maximum bonus opportunity”, which you can do by increasing the percentage of their basic that they can make through that bonus.

Executives basically enjoy a one way bet. They win in the good times, they win in the bad times, they win regardless of how their businesses perform in either.

Such behaviour has, in the past, resulted in criticism from commentators in the media, from unions, even from some politicians. But the people who count, the big institutional shareholders, they have largely shrugged and waved ever more bloated packages through in all but a few cases.

That really needs to change.

One of the factors behind the divisions that have opened up in British society is the difference between the way bosses of public companies (who are usually professional managers rather than entrepreneurs by the way) are treated and the treatment they mete out to their staff.

This has become a cause of deep and lingering resentment, and one of the things that may serve to prevent business leaders from being heard at a time when they really need to be heard (see my earlier piece on Brexit for details).

The trouble is, there is scant evidence that the people who sit on pay setting remuneration committees get it. They largely live in a boardroom bubble, one that sees them making six figures for only a couple of days work a month, benefiting almost as much from a corrupt system as the executives they hand millions to.

On those rare occasions when big City shareholders make a fuss, which they only tend to do in response to extreme circumstances, RemCos are apt to behave defensively.

A case in point? Earlier this year Imperial Brands (formerly Imperial Tobacco) backed away from increasing boss Alison Cooper’s pay out from £5.5m to a potential £8.5m in the face of a rare shareholder revolt.

While the resolution that would have pushed that through was withdrawn from consideration, chairman Mark Williamson said this: “The board continues to believe that revising the policy is necessary for retaining and attracting the right calibre of talent to ensure the continued sustainable growth of the business.”

David Haines, the chair of the remuneration committee, meanwhile said that pay rises were necessary for top bosses because they made “significantly below the average for companies of our size”.

In other words, they just didn't get it.

Trouble is, the sort of mentality displayed in those statements is commonplace across British business. It shows exactly why the make up of RemCos badly needs reforming, to give them more external input. Unfortunately, one Theresa May, who initially suggested that she might do just that, backed away when the going got tough.

However, as much as RemCos are problematic, we shouldn’t forget that it is the City’s institutional shareholders that vote to approve their members, and have contributed just as much to the situation by making a fuss only at such times as boardroom excess gets really extreme, such as at Imps.

If the latter has any sense now, it might now turn to quietly increasing the pay packages handed to Ms Cooper and her colleagues by degrees, so that they end up at the same place, just over a longer period of time. If its RemCo does that, the chances are that it will get away with it.

When more modest rises are pushed through, normal service from City institutions is typically resumed, which explains why dissent has been so rare during the current AGM season. RemCos have got cute. They've learned to play the game.

Trouble is, all this contributes to the stripping from business of any and all moral authority. It makes people reluctant to listen even when its leaders say things that they need to hear (such as on Brexit).

As much as business needs to stand up and make the case for sanity on the latter, it also needs to get its own house in order.

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