Vince Cable’s proposals on executive pay do not really amount to a great deal, but it is worrying that the coalition now seems to have firmly accepted that top pay in the private sector is something in which the government is entitled to intervene.
Mr Cable repeats the Prime Minister’s misleading assertion that rising executive pay is a ‘market failure’, which he seems to attribute to the structure and composition of UK remuneration committees – although the same trend is evident in other countries, from the United States to China, which have very different ways of determining pay.
Although it may be producing a situation which many people dislike, the UK executive market is not failing. It is reacting rationally to the increasing internationalisation of business (remember that over 70% of FTSE-100 company turnover is generated abroad these days) and to the increasing level of responsibility, stress and high visibility facing chief executives (the public shaming of people like Fred Goodwin reminds potential CEOs of the downside risks of decision-making and adds to the premium needed for those taking key jobs).
Turnover among CEOs is very high – around one in seven each year. This reflects on the one hand the fact that for talented executives there are many highly rewarded alternatives to working in publicly quoted companies, so PLCs need to pay sufficient to compensate. To the extent that high and rising turnover is involuntary, potential CEOs also need to be assured of a favourable exit package. This is in many cases not ‘reward for failure’ but the consequence of changes in the external environment which are in no sense the fault of the executives concerned.
Recent surges of executive pay in the UK surely also reflect the effect of taxing marginal income at 50%: in a similar way leading European footballers are increasingly demanding higher pay to move from low-tax European countries to the Premier League.
What of Mr Cable’s proposed measures? Some are harmless. The requirement to publish a summary figure for remuneration is hardly onerous – although there are ambiguities in valuing share options and so forth which reduce the value of such a figure. Some are pointless and irritating: the last thing we want on remuneration committees or company boards (in the blessed name of ‘diversity’) is a bunch of academics and lawyers rather than businesspeople.
Some, however, could cause some collateral damage. A ‘binding’ vote on pay packages may reduce companies’ flexibility in recruitment, and will divert resources of time and energy towards placating key shareholders. If such a vote goes against the board it could precipitate a major crisis within a firm for reasons which may have little to do with its core business. The general introduction of ‘clawback’ rules to make allegedly failing executives repay their rewards positively invites litigation, for failure is rarely clear-cut. To avoid this, companies may tolerate poor performance longer than they should – surely a perverse result.
The measures are unlikely to do much, though, to reduce executive pay. Shareholders are exhorted to take a more active role in keeping pay down, but why should they? Executive pay is a tiny proportion of company costs, with little direct impact on dividends or share prices – but getting the right executive team in is vitally important for the business. 40% of shareholders are based abroad, and may pay rather little attention to over-excitable UK politicians. Most shares are traded rapidly in response to market fluctuations. Long-term shareholders are as rare as horse-drawn buggies these days.
The danger is that the failure of the Cable package to have much impact will invite further, and potentially more damaging, intervention. The Business Secretary boasts that 10 out of 12 recommendations of the High Pay Commission have been accepted, and he is indeed creating a new, presumably publicly-funded, busybody role for its chair, a former Guardian journalist. But Compass, the leftist backer of the HPC, wants more. So does the Labour Party. One thing it says it wants is publication of a ratio between the CEO’s pay and that of the lowest-paid employee, and David Cameron has expressed sympathy for this. The predictable outcome of such a requirement would be that PR-conscious firms would outsource their low-paid work.
Another suggestion is that employee representatives should be placed on remuneration committees, a recipe for conflict. If some election procedure is involved, this would likely be strongly influenced by unions who would take every opportunity to contrast executive pay with deserving cases lower down the hierarchy and maybe influence paysetting for the firm as a whole. This politicisation of pay would take us back to the days of incomes policy and would lead to inefficiency and higher unemployment.
Mr Cable and his supporters are playing a silly game, the future consequences of which could be serious. The pay proposals are irrelevant to the economic problems which the country faces, and upon which the government should be concentrating.