Vince Cable has unveiled a raft of measures to combat excess executive pay, including binding votes for shareholders and a ‘clawback’ of salaries of failed bosses.
In a surprise move, the Business Secretary told MPs one day earlier than expected that the Government will require firms to provide a single figure for each director’s pay.
Dr Cable admitted is was “not the Government’s role” to micro-manage company pay but there were steps that could be taken to tackle the “clear market failure”.
Setting out the measures, he said: “First [we want to see] greater transparency so that what people are paid is clear and easily understood. More shareholder powers, such as the introduction of binding votes so they can hold companies to account. More diverse boards and remuneration committees, and best practice led by business and investor community.”
Vince Cable said:
There is a disconnect between top pay and company performance
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13 Comments
More transparency is an excellent thing.
All the evidence though is that greater transparency in pay has increased, not decreased the amount paid.
It will take a lot more than this to achieve anything material, but that would stir things up so much the Tories wouldn’t let us do it. In fact I doubt if New Generation Labour would have the bottle to let Vince do what is needed either.
When will we get one share holding, one vote? That way ordinary share holders would actually have a voice, and we could have a genuine share holding democracy.
When I think back to all those things that Vince Cable was going to do to sort out the Greedy Bankers . . .
. . . and THIS, is the best he could come up with?
Why doesn’t he just come clean and say . . . “You know what? I rather like my chauffeur driven Government limo and all the perks of government and I’m not going to upset the very people who provide this for me – so here’s a soft cushion to throw at the Bankers, to pretend that I’m actually doing something about it”
Absolutely useless! The Bankers must be laughing up their sleeves at us.
@Simon McGrath:
“All the evidence though is that greater transparency in pay has increased, not decreased the amount paid.”
Au contraire. All the evidence is that it hasn’t affected the tendency for pay to accelerate out of control one teensy little bit.
As Simon McGarth notes transparency is a good thing. There are two opposing arguments. One that top executives are able to command high salaries because they are unique talents, operating in International markets; just like premiership footballers, there are only a few talented individuals who can make a difference at the highest level. The other argument is that company boards often act in their own self interest rather than those of shareholders, and the directors pay themselves well above their free market worth whilst their companies surf favourable market conditions to which they have contributed little. I have come across both in situations in real life. Transparency will help the shareholders distinguish between them. This is a sensible reform from a government minister who thoroughly understands his brief.
Where can we find a list of the proposals? Is the “single number” meant to ban performance related pay then? As I’ve said before, managers and traders can be just as irresponsible and short-term to get a pay rise as they can be to get a bonus – only when the house of cards falls down, you don’t need to keep paying the bonus whereas a pay rise is difficult to reverse and is calculated into the severance package.
I want to know if it is intended to apply to all companies listing in London, including the ones with management overseas (e.g. from the former USSR). Also, if it won’t apply to foreign listed companies, we might see a lot less resistance to foreign takeovers of UK companies. Management can stay in place after the takeover and finally pay themselves what they see as the market rate.
Binding shareholder votes make sense (why on earth would you invest in a company that didn’t have them?), although we are told that the main shareholders in these companies are institutions that put a high value on management – and a fairly low value on social cohesion (which in any case they have no impact on), so why are we expecting this to make a big difference?
More generally though, all this stuff is about shareholder rights. I tend to not be a big supporter of imposing these top down. People who don’t leave their money in savings accounts, but arrive in the City with a big pile of money because they have heard it is a place where the rich get made richer, without the need for them to apply any intelligence of their own at all, even to the question of who should be managing their money and how, are not my idea of unfortunate victims. If they invest their money in companies which see their members votes as non-binding, through useless traders who trade fads instead of fundamentals yet charging high fees, then it is their problem and not ours. We don’t have a duty to make their dream of effortless wealth come true if they don’t know how to do it for themselves. If shareholders move their investments to companies which respect them more then good for them. To most people though I’d recommend opening a SIPP and keeping the money in bonds and having nothing to do with any of this.
As for me, if I had enough spare money to buy company shares, I’d be looking for management that knew how to make money for itself, over management that didn’t think it had enough impact on the business to deserve getting a lot – but it takes two views to make a market as they say.
All good stuff, but a bit underwhelming. What we really need is a proper valuation of share options and other bonus arrangements when they are conferred.
And frankly I would impose tax penalties on salaries or equivalent above a limit of £150k (ie the Prime Minister’s salary). A soft version would be a presumption that salaries (and “consultancy fees”) above this limit are NOT deductible against corporation tax, unless the package can be specifically demonstrated to be wholly, necessarily and exclusively in the interests of the business. And of course a ban on public sector salaries above this limit.
Very pleased to see Vince Cable being barracked by the likes of Philip Davies and Peter Bone. The greater their fury, the better the policy, so keep up the good work!
@Paul K – what would be the rules? Isn’t is a condition now that it has to be for the benefit of the business ro be tax deductible?
@Paul K “All good stuff, but a bit underwhelming. What we really need is a proper valuation of share options and other bonus arrangements when they are conferred”
Not sure what you mean by this. Companies have to take account of the v alue of share options ( which in any case are pretty rare now in US firms) using he Black Scholes formula.
opps sorry meant options are rare in UK firms
What used to limit excess executive pay was sky high marginal income tax rates. When they were >90% there was very little point in directors awarding themselves big pay awards. Since those days we have also seen the rise in faith that ‘it’s the market’; that markets are akin to God and can do no wrong – a bit of econo-theology that has handily sanctified big pay increases.
Now I’m not for one minute suggesting that we should return to old marginal rates but we should challenge the false ‘it’s the market’ justification – the mutual back-scratching that goes on is not a market. What we actually have is an agency problem where, too often, the managers, who theoretically work for shareholders in reality look out mainly for themselves with the long tem interests of the firm relegated to a distant second.
I’m doubtful that the shareholders now have what it takes to exert discipline on directors; they are too diverse and dispersed, too many treat their shares only as gambling chips and too many are too compromised by their own excess rewards to want to rock the boat.
So, a better plan is to revert to that old liberal idea of giving the workforce a formal say. All PLCs should be required to establish a supervisory board comprising shareholders’ and workers’ representatives (but no executives) to control executives. Inter alia supervisory boards should be required to ratify top pay awards and strategic decisions (which too often have amounted to asset stripping).
Not only would this restore sanity to executive pay; it would also go a long way to increasing the planning horizon of UK companies and that could only be to the good.