LDVideo: Vince unveils changes on executive pay

As we reported here on LibDemVoice yesterday, Lib Dem business secretary Vince Cable yesterday announced to the House of Commons a number of measures to curb excessive boardroom pay:


(Available on the BBC website here.)

Here’s how the BBC summarised the proposed measures:

  • making firms’ remuneration reports easier to understand, and requiring them to explain executive salaries in relation to the earnings of other employees
  • increasing transparency by requiring the publication of all directors’ salaries
  • giving shareholders a binding vote on executive pay, notice periods and exit packages – at present their say is merely advisory
  • encouraging a wider range of people onto company boards, including academics, lawyers, public servants and those who have never served on a board before
  • requiring all companies to introduce “clawback” policies, allowing them to recoup bonuses in cases where they are later shown to be unwarranted
  • * Stephen was Editor (and Co-Editor) of Liberal Democrat Voice from 2007 to 2015, and writes at The Collected Stephen Tall.

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    9 Comments

    • toryboysnevergrowup 24th Jan '12 - 1:06pm

      I’m afraid Vince has caved in on this to the political wing of the City of London (aka the Conservative Party) just as he did on Keynesianism and the FSA remuneration code for bankers pay. Leaving aside old LibDem policies in respect of worker representation on boards or even remuneration committees, or even just the general mood music of getting employees and management working together, the proposals for leaving executive remuneration to shareholders have just totally failed to comprehend that the current mechanisms actually give very little effective power to shareholders to change anything in listed companies. Rather than trying to make common constituency with the many ordinary voters, of all parties, who are direct/indirect shareholders in companies through their small shareholding or perhaps more significantly through their investments in pensions, unit trusts and other savings schemes ( and in these days of defined contribution pensions most of us now have a more direct interest than used to be the case) I’m afraid Vince has just left power on this matter in the hands of the City institutions who are the ones that effectively control shareholder votes.

      I have a substantial investment in listed companies through my pension scheme – where is my say on companies who pay their directors who add value to themselves rather than my savings? My funds are managed my an investment company, whose directors have in many cases directorships in the companies in which they invest my money, and which is paid a fixed % return on the funds it manages – rather than a fee based on its ability to obtain rates of return above that of its peers. Why are investment management companies able to get away with payment that isn’t based on performance? Why don’t they ever consult me or other investors on how they manage their investments? Why doesn’t Vince Cable recognise that most shareholders are in effect disenfrancised and ripped off by the current closed shop that is the City of London? Why won’t Vince say boo to a goose? Why not require City institutions to consult the investees regarding remuneration arrangements and mandate them to vote accordingly?

      The proposals in respect of disclosure in the Directors’ Remuneration Report also sound to be pretty flawed. Contrary to what has been reported it is already a requirement for listed companies to disclose a total remuneration figure for each director, and removing the requirement to disclose all the elements that make up remuneration, and all the supporting details, will just mean that it will make it harder for those who can scrutinise the detail to work out what is going on and will allow Directors/Remuneration Committees to pick and chose which bits of information to disclose – and probably avoid the more sensitive or informative disclosures.

    • toryboysnevergrowup 24th Jan '12 - 1:39pm

      Simon

      Most institutional fund managers get paid a fixed % of the funds under management – I think this is wrong. It would be far better if they were paid on the basis of a percentage of the long term (I agree with you that it shouldn’t be a short term return – something like a 5-10 year moving average might be best) return they achieve over a market benchmark for similar investments. A fixed % fee – means that the incentive to the fund manager to pick investments that do well in the short or the long term is pretty limited.

      If you were a wealthy private investor you would probably pay the fund manager on such a basis – but for the rest of us the restrictive practices of the City mean a fixed % charge is all that we are offered.

    • toryboysnevergrowup 24th Jan '12 - 1:49pm

      Simon

      If you want to see a real market abuse it is worth looking at the fees charged by fund managers on underperforming endowment funds – where the management is pretty passive, the returns are below market benchmarks, buit the fund manager still takes out their 1-2% per annum plus some fixed fees whenever they perform a transaction. Quite frankly Vince/FSA should be insisting that such funds be transferred into low cost tracker funds so as to protect the passive investors who clearly do not know hat they have invested in. I was recently told by one such fund manager that they were unable to provide performance figures for the performance of such a fund against a benchmark as they did not have such data!

    • toryboysnevergrowup 24th Jan '12 - 1:59pm

      Re the basis on which fees are charged the following survey re pension funds may be of interest – see pg 12 onwards re performance based fees http://www.lcp.uk.com/media/28785/investment_management_fees_survey_2010.pdf

    • Richard Swales 24th Jan '12 - 5:40pm

      @toryboysnevergrowup – sack them and transfer into a SIPP if they are no good. It is crazy to pay them to look after your money and then tell them how they should do their job because you don’t have confidence in them. Re: short termism, the share price today and tomorrow depends on the markets view of long term profits, so the quickest way to improve the share price and get an immediate profit is to improve the long term prospects. Of course the market may be wrong about the long term prospects, but that is only usually obvious after the fact. If you think you can do better at identifying short-termism, open a SIPP.

      There are hundreds of thousands, probably millions of people who feel the same way as you about corporate management. Why don’t you try to start a movement to get people to open sipps and then build up a controlling interest in a company. You would then be able to put your all your ideas about executive pay, wage ratios and so on into practice. Why do doing through the government have to be the first and only option?

      By the way, I agree with a clawback system for city bonuses. Over the kind of periods they are calculated, they reward predicting the behaviour of other market players more than making the right call about the fundamentals of companies. It would still be better if the firms clients (aka absentee owners) were requesting this instead of the government though.

    • toryboysnevergrowup 24th Jan '12 - 8:21pm

      Richard

      SIPPs are not really an appropriate vehicle for small scale investments with limited investment knowledge – most people do not want to take such an active role in managing their investments. To say nothing of the penalties that would be applied when the transfers are made. They are happy to make reasonable payments to investment managers provided they are based on performance, as opposed to the current rigged cartel arrangements (economies of scale are pretty important in fund management and the cost and other barriers to market entry are also pretty significant), and provided the investment manager exercises what they see as decent corporate governance standards re corporate pay and ethical standards.

      I find it rather unlikely that investment managers are likely to push for executives to be given true performance related pay and proper corporate governace , when their own pay is often not determined on such a basis – and their own corporate governance is at times pretty laughable.

      “the share price today and tomorrow depends on the markets view of long term profits” that is the theory, the actual reality and the evidence points elsewhere. I’m afraid in the real world markets are far from perfect.

    • Richard Swales 24th Jan '12 - 10:02pm

      I agree with you about performance related pay rather than fixed pay. Unfortunately that makes us in a minority for now, but we can keep arguing the case. At the moment traders often have a one-way bet (they get performance bonuses for each percent over benchmark, but lose nothing for each percent under benchmark) – which encourages volatility trading. The way to do it would be to have them on minimum wage, but with the bonuses being paid for how well they do against a target starting from minus 20 percent, with a small bonus for minus 19 percent, a slightly bigger one for minus 18 percent and so on. Unfortunately, nothing like that is likely to get anywhere in the current moronic climate of “no one should get a bonus in a recession” (don’t people realise that sets up incentives for fair-weather-only strategies?). Also, with performance related pay in the corporate world. If the directors of a firm with an annual turnover of 10 billion, take some brave decisions and are able to save one percent of turnover per year, thereby increasing profits by 100 million per year, thereby increasing the market value of the company by about 1.5 billion, what would be an appropriate bonus pool for those directors in the opinion of the general public? The baby-boomers who are leaving the workplace now seem to be of the view that the full 100 million per year should remain in their pensions and the directors should be only hirelings on fixed salaries, and that generation is very powerful politically – look how Major/Blair/Cable were able to pull the ladder up after themselves with student loans and then fees. Look how bizarre it is, that the agenda now is suddenly about stopping employees exploiting absentee owners (which is what the vast majority of shareholders are).

      To a certain extent I agree that many investment managers are not good stewards of money, both in terms of which companies to buy into and in terms of how to run those companies, but the answer is to change managers.

      As for sipps, mine is through Sippdeal.co.uk – There’s not much money in it as I only worked 3 years in the UK before I got out. – I only log on to have a look every 6 months or so. It doesn’t need much more attention unless you start treating it as internet gambling instead of focussing on bonds, zeros etc. I don’t know enough about transfer fees as I started out there, but if it is not easy to transfer your pension between providers then that is something we should look into first. Also, if you want to go the fund route, then you can sign up for a sipp and put all the money into an ethical investment trust (ITs are shares too) – but if you want to change later then you just sell the fund and buy into another one – no transfer fees.

      I know that looks too complicated for many people, because we get zero financial education at school, again, the root problem is elsewhere.

      “The share price today depends on the markets view of long term profits” is correct in itself, but the markets’ view of those profits may be wrong. Times when it has been way off, such as in the dot com boom, were not because of short-termism – but because of a total inability to predict the future for individual companies.

    • toryboysnevergrowup 25th Jan '12 - 1:03pm

      Richard

      On performance related pay/fees I doubt that most people have any problem with a reasonable element for good performance, provided that it doesn’t go so far as to encourage what they view as excessive risk taking. What most people have a problem with is where the performance related measures are rigged so that pay/fees are not related to performance and arrangements where there appears to be no downside in the case of underperfomance. The Lane Clark survey (c pg 14) I linked to – provided some guidance as to “good principles” for performance related fees – and you will see that symmetry of upside and diownside is one of those principles as is placing a limit on the upside (see their graph as to different types of fee structures).

      As a social democrat, who thinks that the market has not worked in setting appropriate levels of executive pay (and investment management fees) which are conducive with a strong and growing economy (I call the 2007-8 financial markets crash as my first withness) I am more than happy to use regulation as a means towards acheiving a better result. I do believe that this could be done without taking away market mechanisms in their entriety – and I don’t think what I am saying is a million miles away from what the LibDems (and in particular Mr Cable) were saying in that fraudulent prospectus they put forward at the last General Election. Y

      ou of course, start from a liberal free market position and so see things somewhat differently (which I can respect) – and believe that if markets are freed up and everyone is properly educated and knowledgeable then the invisible hand will sort everything out. My problem with this view is that I suspect that you would need even more legislation to free up the markets as well as rather a lot of education and encouragement to make everyone become the knowledgeable market participant that you require – and in the meantime there would be an awful lot of vested interest exercising their existing market and other powers in order to maintain and strengthen their predominant position. For example, at present the rules just don’t allow you to transfer out of an employee pension scheme into a SIPP and still continue receiving your employer pension contributions and there just are not investment managers providing the fee and management arrangements that I would like at a reasonable cost.. You may also wish to remember all the spivs and con men that climed out of the wood work when employees were given the option to opt out of the state earnings related pension.

      You might as well say to most consumers and farm producers that if they don’t like what the major supermarkets are doing with regard to squeezing both producers and consumers at the same time – then we can all go off and make alternative direct arrangements. I’m afraid it just isn’t practical – and there comes a time when monopolies, oligopolies and cartels which do form because of a combination of inertia, necessity and vested interests need some regulation to prevent market abuses.

      I disagree on share prices being based on long term views of markets (imperfect or otherwise) – they are just based on supply and demand, and I’m afraid all sorts of things drive the instinct to buy and sell – and knowing a few dealers it isn’t just their view of future profits – Keynes comment on beauty contests is much nearer the mark.

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