Cable is off message on executive pay

Mark Littlewood writes for City AM

The Liberal Democrats have spent much of their conference getting themselves into a sweat about the rich. Both Nick Clegg and Danny Alexander have signalled their reluctance to scrap the top rate of income tax, with the latter announcing the creation of 2,000 new tax collectors to ensure compliance among high earners. Don’t expect that to yield much of a return. The affluent are acting rationally rather than illegally in reaction to one of the highest marginal tax rates in Europe.

I had hoped for a change in tone from the business secretary, perhaps detailing how we could extract ourselves from economic gloom and stagnation, rather than simply obsessing about how to distribute the pain in an era of austerity. My hopes were largely dashed. The eye-catching part of Vince Cable’s speech in Birmingham yesterday was his onslaught against undeserved executive pay. Echoing the Lib Dems’ positioning that times are tough and the successful must pay their fair share, Cable has launched a consultation to get to the bottom of why chief executives’ overall remuneration packages have become so spectacularly more generous (rising about fourfold in nominal terms, from an average of £1m per annum to £4.2m since 1998). Without a corresponding rise in company share prices or the pay of the average worker, Cable sees a strong prima facie case for market failure. He argues it’s not just that the chief executives of our leading companies are fantastically well paid – it’s that it appears to be so undeserved.

His consultation paper floats a plethora of ideas – greater shareholder power, more transparent reporting mechanisms and employee involvement on remuneration committees. Such changes, the business secretary surmises, could save shareholders from their own apparent largesse and naivety and would presumably see a drop in top pay until Cable deemed that “proper market rates” now prevailed.

But with due deference to the business secretary, it is surely likely that if his ideas have any substantial weight, they would have been dreamt up by shareholders themselves by now. So while shareholder resistance to high pay has perhaps increased, it has not reached levels of widespread, majority outrage.

The problem – as with any form of grand central planning – is that the metrics that Cable considers reasonable and obvious in determining chief executive pay are actually highly contestable. Zooming share value, high dividends and growing profits may be down to the brilliance of the chief executive. But, similarly, in an ever-competitive market it may be that a business miracle has been performed simply by halting a slide. This isn’t to say that shareholders won’t use certain measurements to attempt to judge the performance of senior staff – most of us are judged on targets that aren’t wholly within our control – but a sense of a wider picture will also be needed.

Read the rest of the article on the City AM website.