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Executive Pay - the moral high ground ?

Posted: Thursday 18 February 2010 by Nick Topazio
Replies : 3
Category: Financial reporting
Keywords: banking, bonuses, finance, remuneration, Report Leadership, transparency
Nick Topazio's picture
This week has seen a number of stories about executive pay. We have had Shell announce that they will freeze executive directors' salaries for a year. The top two executives in Barclays have forgone their multi-million pound bonuses and cut their company's pay to revenue ratio from 44 per cent to 38 percent. Whereas HSBC is likely to court controversy with reports of 30 to 40 per cent salary increases for top executives.

Restraint at Shell follows on from sustained shareholder activity which included a 60 per cent ‘No' vote against proposals to award discretionary bonuses to executives for performance in 2006-08 despite targets being missed.

The announcement from Barclays regarding the pay of John Varley, chief executive, and Bob Diamond, president, seems to be an attempt to take the moral high ground in the global debate about the future of bank regulation.  Although a laudable act from the top two; does the overall pay policy of Barclays support this moral leadership role?

Cutting the pay to revenue ratio does seem to be a step in the right direction but, at 38 per cent, Barclays is positioning itself on a par with Goldman Sachs and JP Morgan. The average banker at its highly successful Barclays Capital subsidiary is reported to take home close to £200,000 which will not go down well with many in today's distressed financial climate.

And then there is HSBC, who are said to be consulting investors about increasing the basic salaries of its chief executive and finance director. The significant salary increases reflect increased responsibilities but also a shift in emphasis from performance-related pay to fixed income. This might seem to be a natural response to the public and political furore over the bonus culture but HSBC does seem to be risking a heated battle with shareholders and others.

HSBC argues that it has an excellent record of transparency over its remuneration policy and it should be commended for this. I worked some time ago with the Report Leadership initiative to produce a practical guide to remuneration reporting that both communicated how pay, strategy, risk and performance could be linked as well as complying with the necessary regulations. The messages in this report are still valid today - clear and transparent reporting is essential if a company is to avoid rumour and misinterpretation and there will be a significant test of resolve in this area in the coming reporting season.

The Report Leadership Executive Remuneration report is available to download from the group's website

Are there any other stakeholders?

Posted by Cliff Moggs on Friday 19 February 2010 19:41
If employees, regardless of their hierarchal level are considered ‘stakeholders’ can one equally ignore a fair compensation practice? The question raised in James O’Toole book in 1985 (Vanguard Management: Redesigning the corporate future) was, ‘power and bucks’. Are the ‘contribution’s’ truly shared or even respected? Regards Cliff Moggs

Remuneration by the exercise of 'power'?

Posted by Cliff Moggs on Monday 22 February 2010 19:26
 Remuneration committee’s have the perceived wisdom to decide that future results are the basis and a justification for variable levels of compensation for executives in addition to their base salary. On the other hand, for the majority of employee’s (though equal stakeholders and/or partners) and displaying the same wisdom it is able to equally determine that the same future results will deny nor justify additional compensation for this group. For this group, compensation is judged to be correct regardless of their contribution to results. The UK’s ‘John Lewis’ (A major departmental retailer) does not support this logic, its workers are ‘partners’ and equal participants in the financial success of its operations. Of course there are fortunately, a few other organisations, as well as John Lewis, that recognise ‘equity’ for all its stakeholders in its remuneration and benefit policies.  The ‘JL’ model however, is not widely accepted and tends to support that the issues, raised in 1985 by James O’Toole, remain (See earlier post). Treating or even respecting employees as ‘stakeholders’ is meaningless rhetoric, unless, there are similar rewards as for executives, equity. The facts, surrounding the ‘power’ of executives is clear as evidenced by CIMA’s dedicated paper to explain or is it to justify executive compensation plans? Another example of ‘power’ is where a ‘national UK retailer’ in considering changes to its pension plan, proposes that its ‘executive’ grade get 15%, ‘managers’ 12%, and the ‘rest’ 6%, of ‘salary’ as a contribution to a future pension. Is the logic that an hierarchal level requires ‘more’ to live on in retirement or a demonstration of ‘power’? The life expectancy ‘pension value’ of a lower hierarchal status is considered and argued to be less. Lower wage earners need lesser relative amounts to live but food/utilities etc costs will be the same.  ‘Generico’, CIMA’s ‘Fictious perfect entity’ states that ALL persons are participants in its ‘annual bonus plan’. The bonus has a maximum pay out of 150% of base and in 2007 the executives received approx.100%, should one assume that all other employee’s received about double their base wage/salary? As this is a ‘fictitious’ entity, know one really knows, but perhaps one can question why its authors wished to evade a conclusion, is it not ‘important’ or is it perhaps a ‘mind set’?  ‘Power’ is evident, not only is there a question of unwillingness to forgo and replace with, say ‘shareholder control’ but the recipients continue to remain silent and accept. Though I would not be surprised that in some cases ‘charity’ becomes the beneficiary, but this is really in place of the shareholders negligence who have relinquished ‘power’. Regards Cliff Moggs 

Pausing at the trough to take a breath?

Posted by Adrian Rutter on Tuesday 23 February 2010 13:27

Can never square the circle that some people seem to think the way to motivate executives is to pay them exorbitant amounts of money, while the way to motivate the unemployed is to pay them minimum wage.

Wonder what would happen if bank executives were paid the median salary for all their employees not on the board, with a discretionary annual bonus based on the five-yearly growth in shareholder wealth?