Cameron on public sector pay

As part of an attempt to portray his party as a ‘radical’ party, ‘Call me Dave’ Cameron is looking at linking the pay of public sector executives to the pay levels of the lowest paid in the organisation: pay at the top should be no more than twenty times pay at the bottom, as part of an initiative on ‘fair pay’.

Two points, really:

1. there is no private sector ‘authority’ for doing this, as Cameron’s article appears to claim: there may well be ‘some’ private companies that operate similar practices but let’s not kid ourselves that the private sector is setting a lead here: it isn’t. We can all cite one or two, but I’d challenge Cameron to use two hands to count the numbers of private sector companies that actually use such multiples.

2. pay levels are actually more compressed in the public sector: the lowest paid tend to be paid higher than their counterparts in the private sector; the private sector pays better for those with higher education and degrees. So, the differential between high pay and low pay is much less in the public sector than it is in the private sector, where the need to tackle unfair pay is, therefore, much greater.

Is that a vote for a high pay commission then, Dave?

Peston on bank bonuses

Ahead of tomorrow’s questioning of Royal Bank of Scotland Chief Executive, Stephen Hester, by the Treasury Select Committee, Robert Peston has a few choice questions of his own, to whit:

1. What proportion of investment banking profits can be put down as an exceptional windfall?

2. Given that bonuses are discretionary, on what basis have banks decided to pay record amounts to some executives?

3. Are investment banks as dependent on the skills of particular individuals as they think?

Have investment bankers in the world’s five ‘leading’ investment banks, reporting over the next two weeks, really earned $65bn in salary and bonuses for 2009 (a sum bigger than the economies of some EU member countries)?

(Oh, sorry – that was the rhetorical question.) As Nigel Stanley points out over on ToUChstone today, boardroom pay is now ‘well beyond the rational’. Given that the Chancellor’s temporary bank payroll tax is likely to realise – even at expanded levels – some £2bn (a sum which it would be useful to ring fence around a particular stated social use, by the way), the ease with which such a sum could be absorbed by corporate plc illustrates the need for further action on out-of-control pay. (Remembering that the purpose of the tax was to tackle the reward culture that pays out bonuses for excessive risk taking, a likely take some four times the original estimate of £550m (p. 117) has clearly some way to go to achieve its aim.) Even the FT is arguing for some regulation of [finance industry] bonuses where these are paid out by under-capitalised institutions (hat-tip: Tom). So, once again: a high pay commission, anyone?

How much is your job worth?

The new economics foundation has today published a provocative document looking at the real value to society of a range of different professions in the attempt to explore issues around how our pay relates to ‘worth’ as well as the inter-relationship between the work that we do and the impact on wider society.

The report compares six professions and ten ‘myths’ about pay and work and, while it won’t surprise (given its stated purpose to ‘shatter some myths about work and value’) that nef’s methodology delivers some justification for Adair Turner’s views of the ‘socially useless’ nature of large swathes of banking activity, nor that cleaners and waste recycling workers are engaged in work that is far more socially useful, the report nevertheless produces some highly interesting points for policy-makers. Its central conclusion, that:

We urgently need to align incentives with the social and environmental value that are generated by the workforce,

is one that (with an appropriate grammatical correction!) needs further promulgation in a world in which pay is set at one end of the market by peers and, at the other, by a race to the bottom driven by the need to make savings on outsourced contracts, whether in the public or the private sector, and where work is dominated by vulnerable workers rather than ones which share a belief that they are ‘masters of the universe’.

The difficulty that remains is that, in a privatised, globalised world, where issues including wages have been handed over to the frequently distorting hand of neo-liberalist perspectives, reining market-induced excess back in again demands intervention and regulation and will increasingly demand internationally-co-ordinated action. Difficult things to achieve in practice and ones that are likely to require clear and concerted explanations if they are to be ‘popular’ in action, and not just on paper in individual opinion polls.

Nevertheless, the report is a timely one in that, in a post-crisis world, priorities will have to be set for public finances; having a framework for why public services need to be maintained, why there is a need for a commission to explore high wages and why decisions have been made over taxation policy, to name but three examples, is an essential first step in setting out why such priorities have been set – and indeed, why they are important. It is also likely to require a government that has confidence about its decisions.

Bankers’ bonuses (again)

Apart from Copenhagen, today’s major news stories all feature this week’s much-anticipated Pre-Budget Report.

Significantly, Chancellor Alistair Darling is considering including a ‘crackdown’ on the bonuses of highly-paid City bankers in his PBR speech, via a windfall tax, after apparently having dismissed a windfall tax on banking profits themselves as likely to jeopardise the strengthening of banks’ balance sheets. Larry Elliott in The Guardian summarises the economic and historical case for such a tax, while William Keegan, his colleague over at The Observer, also provides some interesting political context for longer-than-short-term hopes that a revived manufacturing industry (hopefully including, as Elliott argues, a large element of green investment) might take the place of the recent economic over-reliance on the financial services sector.

At the same time, the Engineering Employers Federation, making its own pitch to the Pre-Budget Report, points out that confidence remains fragile even if a recovery is in sight while leading economists have written to the FT to point out that, in this context, public spending cuts will undermine the recovery – a sentiment well in tune with the TUC’s Brendan Barber’s own thoughts on the PBR yesterday and specifically welcomed by him today.

Regardless of its evident populist appeal, a punitive tax on the bonuses of bank executives remains the right thing to do in the context of the banking profits on which such bonuses are proposed having been made on the back of taxpayer-funded bail-outs and on the impact of the Bank of England’s quantitative easing programme. It does, clearly, need to be sufficiently robust to circumvent City creativity (not least to allow the tax to follow bonuses awarded in respect of this financial year but paid in future ones, or in shares), and to be on a sector-wide basis so as to prevent poaching by other financial institutions. Nevertheless, the practical difficulties inherent in a particular policy are rarely sufficient to undermine whether or not it is right to implement it. Darling will evidently need to define the tax carefully – but if it encourages banks to pay smaller bonuses, then it will have done its job. It is, ultimately, a question both of accountability and of legitimacy; in forcing financial institutions to confront the legitimacy gap in what they are proposing on bankers’ bonuses, Darling will be doing democratic values a favour, too.

Some big (and some not so big) numbers

1. £850,000,000,000 – the cost of taxpayer financial support for an otherwise collapsing banking sector assessed and detailed today by the National Audit Office. The actual amount committed so far is actually £131bn – the rest will fall due if it all gangs agley (again) and the sheltered assets need the protection of the guarantees staked on them. Which it won’t, because of big number No. 2:

2. 5,000 – the number of senior executives working in the banking sector which Lord Myners told the House of Lords yesterday are likely to receive a ‘remuneration package’ this year of £1,000,000 (or more): clearly, such awards must mean that everything is rosy in the garden again. Myners is writing to the NAPF, the CBI and the TUC to ask them to use their influence to persuade fund managers to stop these ‘unreasonable and unjustified levels of remuneration’. Nils Pratley in The Guardian today is calling for a windfall tax on executive bonuses.

3. 5p in the pound – what creditors of Farepak, including ordinary families who had committed an average of £400 in hard-earned cash, and some over £2,000, received (starting from October 2009) following the collapse of Farepak (in October 2006) after some ill-advised financial engineering following which HBOS (oh yes) called in the company’s overdraft. The commercial fund set up to support Farepak creditors, including families, raised just £6m – far short of what was anticipated and likely to have provided an earlier (additional) sum of just 15p in the pound.

A windfall tax on (at least) £5bn (though not all of this is bonus) is likely to raise a substantial sum, provided it is set at a punitive level. I can think of some worthwhile uses for it, too.

The recession and middle Britain’s shrinking wages

The TUC has published a ToUChstone pamphlet – the first in a new series – exploring the role of the declining share of wages in national wealth and the much less well-known role this has played in the recession (see TUC press release).

The author on behalf of ToUChstone – Stewart Lansley – also wrote the earlier work on middle income Britain (blogged here) which documented the rise of an onion-shaped distribution of wealth in the UK and the rising divide between an affluent 40% and the bottom 60%. In this new report, he focuses in more detail on why middle- and lower-income Britain has been left ‘in the slow-lane of rising prosperity’ (a theme also picked up in The Guardian‘s Comment is Free pages today, although seemingly rather obliviously to Lansley’s work).

In his blog post for ToUChstone introducing the pamphlet, Lansley highlights that wages held steady at around 60% of national output for much of the twenty five years after 1945, before rising to 65% in 1975. Now, however, they account for 53% – a fall mirrored elsewhere: more steeply in the US, more shallowly in continental Europe – as a result of the erosion of employment rights [here Lansley is kind to his hosts: trade union weakness in general terms is also a factor], as well as reduced demand for unskilled labour and the transfer of jobs triggered by globalisation. All of this has contributed to boosting the bargaining power of employers which has had the effect of wages falling behind productivity growth – the wage squeeze.

The effect is that families borrow more to maintain living standards – staggeringly, households borrowed an average of 45% of their income in 1980 but 157% in 2007.  Of course, individual choice is an aspect here, but the wage squeeze implies that, formerly, such a level of living standards were financeable from wages whereas this is currently not the case. At the same time, rising company profitability – the counterpart to wages falling behind productivity – flowed into justifying record dividend payments and an explosion in executive remuneration, while higher rates of return in financial engineering led to the replacement of funding for long-term success with money being moved around specifically to chase the quickest return. This, in turn, lays behind the other, more well-known, factors in the current crisis.

The policy conclusions are not only that cuts would end a recovery before it has properly begun – since wages fuel spending – but that, in the long-term, the share of wages in national output needs to rise again.

Clearly, this latter is much easier said than done. Essentially, we need to confront and overturn a thirty-year orthodoxy which, albeit incorrect, has led to a major weakening of, and support for, the institutions capable of delivering that level of confrontation. It means essentially that people need to adopt a much greater degree of solidarity with and for each other, and reducing the importance of self (and self-interest) in doing so. Twelve years of Labour government, despite some important initiatives and an awful lot of warm words, has done little to change the increasing individualisation which lays behind the policy initiatives of the previous twenty. Challenging that orthodoxy clearly needs to take its place in a proper consideration of economic alternatives and Lansley’s pamphlet certainly helps to inform the debate here. Nevertheless, we should recognise not only that this sets out a specific challenge for trade unions (and, indeed, their members) but also that the scale of that challenge is significant.

Adair Turner – FSA heretic

Selected extracts from Adair Turner’s Mansion House speech given last night:

‘…Hundreds of thousands of British people are newly unemployed; tens of thousands have lost houses to repossession; and British citizens will be burdened for many years with either higher taxes or cuts in public services – because of an economic crisis whose origins lay in the financial system, a crisis cooked up in trading rooms where not just a few but many people earned annual bonuses equal to a lifetime’s earnings of some of those now  suffering the consequences.  We cannot go back to business as usual and accept the risk that a similar crisis occurs again in ten or 20 years’ time.

We need radical change.  Regulators must design radically changed regulations and supervisory approaches, but we also need to challenge our entire past philosophy of regulation…

… not all financial innovation is valuable, not all trading plays a useful role, and … a bigger financial system is not necessarily a better one. And, indeed, there are good reasons for believing that the financial industry, more than any other sector of the economy, has an ability to generate unnecessary demand for its own services – that more trading and more financial innovation can under some circumstances create harmful volatility against which customers have to hedge, creating more demand for trading liquidity and innovative products; that parts of the financial services industry have a unique ability to attract to themselves unnecessarily high returns and create instability which harms the rest of society…

… So the FSA, on behalf of society, must consider whether the financial services industry is delivering its vital services in an efficient and risk-controlled fashion… [This]… impl[ies] an important and profound shift in regulatory philosophy…

… It does mean that the top management of banks… need to operate within limits.  They need to be willing, like the regulator, to recognise that there are some profitable activities so unlikely to have a social benefit, direct or indirect, that they should voluntarily walk away from them.  They need to ask searching questions about whether the complex structured products they sold to corporate and institutional customers, truly did deliver real hedging value or simply encouraged those institutions into speculative and risky exposures which they did not understand: and, if the latter, they should not sell them even if they are profitable.  They need to be willing to accept the capital and other requirements which will be imposed on activities of little value and considerable risk, rather than deploy lobbying power to argue against such constraints on the basis of a simplistic assertion that all innovation is always valuable.‘

Powerful stuff.

The regulatory reform Turner spoke of refers to a number of issues:

– a requirement for the global banking system to be more prudent and to operate with larger shock-absorbing buffers of capital and liquidity

– the imposition of much higher capital requirements against many riskier trading activities and a bias towards conservatism in the capital requirements for trading in complex and potentially risky products where the benefit to the economy is unclear.

– a far more assertive style of supervision, no longer willing to assume that market discipline and incentives will always lead bank management to make optimal decisions and one more willing to make judgements on whether business models and business strategies create undue risks for the whole financial system.

Perhaps a quiet, rather than profound, still less radical, reform.

Nevertheless, Turner also had words to say about banking bonuses, reminding his audience that new FSA rules require remuneration committees to make a key part of their consideration the risk consequences of remuneration structures and of the need to get these structures right for the long-term. In particular, banking bonuses need to be consistent with the priority of using the extraordinary profits now arising to rebuild the system and, that, long-term regulators will have a ‘legitimate interest’ in aggregate bonus payment rates ‘if and when these payments have implications for capital conservation’. So, banking bonuses are also part of the reform programme.

Turner appears not to have been carried out to Smithfield and burned but the level of apoplexy in the room at his address and the issue of reform can be imagined. But, at the very least, kudos to Turner for entering the lion’s den and reminding people that, ahead of the G20 meeting later this week, far from a return to ‘business as usual’, much of what bankers do remains contestable in terms of public policy.

Executives having a good recession

Research published today by PIRC and pension fund Railpen highlights the growth in executive remuneration despite the recession. The research is intended to help inform the debate in the US for UK-style shareholder advisory votes on executive remuneration in the US but, as The Guardian report of the publication illustrates, and despite a welcome rise in shareholder rejection of such reports during 2009, shareholder power is exercised all too infrequently in this country.  (This isn’t intended to imply that shareholder votes are not a good idea for the US.) Executive pay amongst FTSE100 companies has still risen by 80% between 2000 and 2008, despite a 30% fall in the FTSE index in that time, while the average vote against executive remuneration reports has actually fallen since hitting a peak in 2004.

This comes on top of The Guardian‘s own research into executive pay levels, published last week, demonstrating a widening gap between executive and staff pay during the recession and reporting that the pay of an average FTSE100 chief executive is worth around 100 school teachers.

Nevertheless, PIRC argues that, even though shareholders need to do more to exert their rights, the introduction of shareholder votes on executive remuneration has:

‘… clearly led to more engagement on remuneration and the shift towards a greater proportion of total rewards being performance-related is evidence of this.’

A thoughtful series of posts by Tom over at labour and capital (see, in particular, here and here) highlights that we have a substantial way to go in fathoming out the issue of remuneration as a driver of executive behaviour and on the notion of the extent to which shareholders really are able to exercise ownership powers. The response of the Institute of Directors to the Walker Report, published today, calling Walker’s proposals on executive bonuses and long-term incentives ‘too prescriptive’, calling instead for a statement of best practice, demonstrates succinctly where the power base lies. In times of a call for a high pay commission, revisited by Compass also last week, and when the G20 will be debating clawbacks on remuneration, at least of bankers’ bonuses should profits fall, the IoD’s simple arrogance in proposing no curbs but a mere code of practice looks out-of-touch and as displaying more than a touch of arrogance.

I remain sympathetic to the notion of a high pay commission as a means of examining the issue and coming up with some serious proposals: addressing in practice the laxity of corporate governance in the area of executive remuneration remains otherwise an issue in need of a strategy.

Compass calls for high pay commission

Pressure group Compass has called for the establishment of a high pay commission to curb excessive pay amongst ‘masters of the universe’ and to assist in the establishment of a ‘fairer, more stable and sustainable economy for the future.’

Compass’s statement, led by Brendan Barber of the TUC, Jon Cruddas (Labour MP for Dagenham) and Vince Cable (Liberal Democrat Shadow Chancellor) and supported by 97 other signatories encompassing Labour loyalists alongside more radical voices, has also appeared as a Letter to the Editor in today’s edition of The Guardian. Here, the authors of the Letter call on the government to take ‘decisive action’ on the ‘excessive levels of banking and executive remuneration packages’ which have had such a ‘damaging and corrosive effect on the real economy and wider society’. Compass is calling on members of the public to add their signatures, which you can do here.

Against the background of the successsful establishment of the Low Pay Commission in 1997, a high pay commission would be charged with the review of executive pay and coming up with proposals to restrict excessive remuneration, such as maximum wage ratios (for which Connected Research has called for in the past), and the taxation of bonuses.

No doubt warned of the initiative, Alistair Darling yesterday referred (amongst other things) in an interview with the Sunday Times to the possibility of changing the law to ‘toughen things up’ on executive bonuses, with a law likely to be forthcoming in the autumn covering the entire banking system designed to ensure that bonuses are paid on the basis of sound overall performance rather than on taking risks which jeopardise institutions (and economies). The Treasury had already dismissed last week’s plans from the Financial Services Authority for a remuneration code of practice as not going far enough.

The arguments are undeniable, not just from the perspective of the financial-led economic crisis but also from that of establishing a fairer society. There is a need to ensure that levels of executive remuneration, which have rocketed compared to that of the ordinary employee, are controlled both from the point of view of ensuring that there is no reward for failure while also delivering overall remuneration within an organisation which fits within the principle of ‘felt fair pay’. What we have currently is the reverse and a high pay commission to address that (while looking at the overall level of executive remuneration, not just basic pay) is an essential ingredient in identifying what can be done about it. People are right to be increasingly angry at excess in the financial sector and if the commission can build on that, while opening people’s eyes to executive excess not being limited to financial services, it will have done a good job.

The government may well turn out not to be sympathetic to the notion of a high pay commission (or it may surprise us all) – but that doesn’t change the need for one to be established, or to the job it could do. That might be a question for the wider labour movement a little way down the line although a version with official status is clearly preferable.

[Edit 18 August: Alistair Darling has already rejected the notion, according to the BBC. That shouldn’t prevent continued lobbying activity aimed at changing his mind in the meantime, but proponents of social justice would do well also to consider in the slightly longer-term how a non-official version might best be secured.]

Executive pensions revealed

Actuarial and benefits consultancy firm Lane Clark & Peacock has produced a new version of its Executive Benefit Survey (registration required to view).

The prompt for the report is clearly the changes announced in the April budget to the system of tax relief applying to the pension contributions of those who earn more than £150,000  (blogged about here) – about which more later.

The basis for the report is the published 2008 annual report and accounts data of the entire FTSE100 as at the end of June 2009, covering the pensions arrangements of the 341 directors in office at the end of their company’s accounting year. So, in terms of coverage, it’s as comprehensive a review of executive pension arrangements as we’re likely to get. The headline news is, perhaps, not terribly surprising but it’s no less staggering for all that:

– more than one-half of directors have some defined benefit provision as a part of their pensions arrangements, while for 35% defined benefit is the only form of provision

– the median cost of directors’ DB provision is 51% of salary: the mean cost (inflated by some very large figures) is 70%

– across the board, average pension contributions (including in DC schemes) amount to 46% of basic salary (15% of total remuneration)

– less than 5% of directors have no pension provision at all (a figure inflated by three mining companies none of which offer a pension)

– 15% of directors receive cash in lieu of a pension, where the median pay-out is 29% of basic salary

– 28% of directors have pensions provision based solely on DC schemes, where the median contribution is 20% of basic salary.

It must also be pointed out – though not mentioned in the survey – that accrual rates in defined benefit schemes tend to be much more attractive at executive director level – frequently being 1/40 or even 1/30, rather than the 1/80 which increasingly guides accrual for everyone else. Where directors are appointed from within this, together with the massive increases in salary that guide executive remuneration, mean that pensions provision for promoted directors becomes extremely expensive. New directors hired from outside the company were, it must be said, only exceptionally given DB provision.

The concern prompting the report is the Budget-based limitation of tax relief for people earning more than £150,000 a year to the basic, rather than the marginal, rate of tax – a move which, at average levels, Lane Clark & Peacock said would lead to directors paying £50,000 a year more in tax. The solution? Well, the report helpfully indicates that, at 50% tax rates, this is equivalent to a £100,000 hike in salary. Alternatively, Lane Clark & Peacock suggests that we might well see a return to the use of unapproved schemes which do not benefit from the same system of tax reliefs but which have no limits on the amount of pension that can be provided. 31 of the companies in the survey already offer some form of unapproved pension scheme to top-up existing provision but their more widespread use in the future is predicated on the assumption that the 2009 Budget changes won’t apply to unapproved schemes.

I’m not convinced that a move to unapproved pension arrangements for directors is really in tune with these times, either with the notion that executive pay needs somehow to be controlled, with the notion that we all need to exercise restraint given the economic situation, or with the the requirement for increased transparency. Sometimes, it seems, they just don’t get it. Or perhaps it’s me.

Mark Jackson, Partner in Lane Clark & Peacock, said that:

Remuneration committees have reached a cross-roads on pensions for their executive directors. If they carry straight on, their directors face a new tax, so they need to consider alternative routes such as paying cash instead, no pension at all, or pensions that are not tax-registered with the HMRC. Whichever route they take it will be lined with spectators from shareholder groups and the media, so the route needs to be chosen with care.

I just love the wording of that second sentence – in particular, its presumption that companies will indeed find a way for their executives to avoid the increase in taxation.

Meanwhile, the routes they take will be attentively watched from the blogosphere, too.

Walker report calls for greater shareholder involvement

The Treasury-backed Walker Review has published its first consultation document today.

The Walker Review was set up in February under the control of ex-City figure Sir David Walker to examine corporate governance in the UK banking industry (extended to other institutions in the financial sector), with a particular perspective on banks’ boards and pay policies given public anger at bankers over the crisis in the financial system and the extent of taxpayer support for keeping banks solvent. The Review thus far is a product of Walker’s discussions with industry figures and corporate governance experts so – at least to some extent – its suggestions are ones that the industry may have indicated it can accept: it is something of a last chance for self-regulation. Political support has already been forthcoming, with Gordon Brown telling the Commons Liaison Committee that he thought the recommendations would be adopted, while the Financial Services Authority would be issuing a revised code on standards of remuneration. So, even though the final report is not due out until November, the first statements appear to have a fairly concrete look about them.

Walker’s 39 recommendations designed to improve accountability of banking boards include, among them:

– board level risk committees to be chaired by a non-executive, with these to have the power to scrutinise and block big transactions

– remuneration committees to have the power to scrutinise firm-wide pay, including of high-paid staff not on the board

– bonus schemes for all highly-paid executives to have a significant deferred element

– the pay of highly-paid executives to be subject to greater scrutiny

– the chair of the remuneration committee to face re-election if the report receives less than 75% approval

– non-executive directors to spend up to 50% more time on the job and to face tougher scrutiny under the Financial Services Authority process

Tom at labour and capital‘s first sight of the report was to identify some good bits and some areas where Walker had ‘bottled it’; on closer inspection, ‘This does not look like the sort of document that reform-minded investors would have been hoping for.’ Perhaps no surprise there, given the processes involved in the production of the report.

Evidently, the aspects of the Review to have attracted most comment are those on board pay and bonuses. Here, a compelled greater deferred element ought to contribute to the central aim of not subjecting banking stability to the risks of executives chasing risky projects on the back of short-termist bonuses, although it seems that the proposals don’t disallow these; they merely only ensure pay-out once the distance of time has ensured that there has been no medium-term impact of whatever projects have been instigated.

Remuneration committees reviewing firm-wide pay would also seem to have something to offer although, if it is to prove genuinely firm-wide, and to have a chance of achieving genuine change, the presence of genuinely independent voices – like those of employee representatives, for example – would be required.

However, it is beefing up the role of non-executives that is perhaps the most interesting aspect. Here, Walker starts from the laudable aim of ensuring that the proposals are:

‘Designed to improve the professionalism and diligence of bank boards, increasing the importance of challenge in the board environment. If this means that boards operate in a somewhat less collegial way than in the past, that will be a small price to pay for better governance.’

Actually achieving that is key in the corporate environment and it has general applicability, not just to the banking sector. But, Walker is right: the corporate world is too collegiate. That means (at least) two things: breaking up the ‘cosy club’ aspects of the corporate world, so as to allow an atmosphere of greater independence and challenge; and ensuring greater actual accountability to and control by shareholders.

Breaking up the clubs means ensuring that executives are drawn from a wider pool so that they are both more representative of opinion from outside the usual executive circle but also less incestuous in terms of directors accepting responsibilities for supervising, and being supervised by, each other. The problem essentially is that exectives think like each other not only because they tend to mix only in each other’s company but because they are drawn from the same backgrounds and have a consequently consensual world view – what the TUC accurately calls in its response ‘groupthink’. The notion of independence, of challenge, in this atmosphere is a difficult one to sustain.

This seems to me to mean thinking again about the potential of having different structures at board level, moving away from the Anglo-Saxon model towards structures which assume a greater supervisory authority over executives, and which could have a greater social construction starting (of course) in banks where the state has control. Greater accountability would certainly be aided by representatives from different backgrounds asking tough questions to which the answers cannot be taken for granted. It should also improve the quality of corporate decision-making.

Walker has also proposed increasing the time commitment of non-executives by 50% – a reflection of a view that non-executives have too little authority since they have too little time to get to grips with issues. However, I think Walker needs to go much further, as well, and place greater controls on the number of directorships that directors can assume. This would also achieve his aim of ensuring directors are qualified by an understanding of the industry in which they work: a welcome end to the practice of believing that retail executives, for example, can run a bank.

Neither of these things, I would imagine, are likely to be achieved voluntarily, on a self-regulated basis, or within anything like an acceptable timeframe.

Ensuring greater accountability by increasing shareholder power (my words, not Walker’s) is also problematic. The TUC’s most recent survey of fund managers’ voting patterns revealed just one institution which had voted against the acquisition by Royal Bank of Scotland of ABN Amro, together with a rather patchy record on remuneration reports. Breaking up the executive clubs has a contribution to make to the extent to which institutional shareholders can genuinely influence corporate policy-making but greater diligence, as well as a greater ear to the notes of independent research consultants in this area, would also seem to be required. Developing the ability to challenge poor corporate practice would also require a greater exhibition of distance and independence amongst institutional shareholders than we are used to seeing and, perhaps, a more diverse representation for the same reasons as expressed above.

MPs call for banking bonuses to be taxed at 90%

An Early Day Motion in the House of Commons posted by Liberal Democrat MP Richard Younger-Ross, noting the ‘generally excessive’ bonuses which continue to be paid to bankers, calls on the government to ‘limit bonus payments to bankers by applying a 90 per cent tax on all bonus payments in excess of 15 per cent of salary.’

Early Day Motions are formal motions submitted for debate in the House of Commons, although very few actually make it to the floor of the Commons. Their use tends to be focused instead on publicising the views of sponsoring and supporting MPs, or on drawing attention to specific issues.

EDM1847, posted originally last Thursday, has so far been signed by 22 MPs. It has been given greater credence this week by the news that Goldman Sachs, the US bank which has received loans in the US government’s Troubled Asset Relief Programme, reported a net profit of $3.44bn for the April-June quarter on net revenues of $13.8bn (a 47% increase on the previous quarter). It has paid off £10bn in loans received under the TARP. It paid its 29,400 employees some $6.65bn in pay and bonuses in the quarter – an average of $226,000 each. Robert Peston’s rather under-stated reaction on his blog (inspired perhaps by him being evidently gobsmacked by the recorded figures) was simply to query ‘whether taxpayers shouldn’t have demanded a bit more for their succour’.

Despite an instinctive sympathy with the perhaps rather populist aims of EDM1847 – which at least aims to focus anger on the culture of bonuses in the financial world – the long-term aims behind it (even (or, it would seem, especially) in a period of state ownership of financial assets) would seem to be better served by greater shareholder activism and the sorts of initiatives being espoused by PIRC. Generating support for shareholder activism and convincing shareholders that they need to use their votes to express public discontent over bonuses, for example, is increasingly key if companies are to govern with consent in the post-financial crash era. Convincing people to support such a programme, and overcoming the twin malaises of inertia and inaction in the face of the apparent immediate restoration of the ‘greed is good’ culture and the evident cynicism presented by the presence of old school tie networks in and around the executive remuneration arena, are essential, and essentially difficult, first steps.

Capitalism will, otherwise, eat itself. But what price that for our pensions?

PIRC opposes C&W remuneration report

According to a report in The Herald, shareholders in C&W have been asked in a client note by corporate governance and shareholder engagement consultancy Pensions Investment Research Consultants to reject the company’s remuneration report at its AGM, due to take place on Friday, and also to oppose the re-election of Richard Lapthorne, company chair.

PIRC believes that Lapthorne’s receipt in 2007 of 5.5m shares under the company’s long-term incentive plan is indicative of executive responsibilities and that this is incompatible with his status as a non-executive director. The Higgs Report in 2003 on the role and effectiveness of non-executive directors was intended to ensure that non-executive directors had a greater role in supervising executive actions, while there is also a clear link here in terms of the role of non-executives in reviewing executive remuneration.

PIRC is also critical of ‘potentially excessive’ private equity-style executive remuneration in the form of the company’s long-term incentive plan, which is linked to the rise in the company’s share price over four years and which, in a separate resolution (which PIRC is also calling on shareholders to oppose), C&W wants to extend for a further year. PIRC notes that the plan is: ‘A cash based incentive of a type usually found in a private equity speciality finance company, whose performance conditions are vague,’ and which, it believes, could see executives receive share awards of four times salary.

The Herald also reports that the Association of British Insurers, whose members hold some 15% of C&W’s listed shares, has also issued a ‘red top’ warning – indicating a breach of corporate governance best practice – in respect of the plan over which, it says, the ABI has heard no defence from C&W’s executive remuneration committee.

At the 2007 AGM, C&W saw 10% of shareholders vote against the removal of a £20m bonus cap.

Edit (21 July): At the AGM, shareholders voted in favour of the resolution on the LTIP but 25% of the votes cast were against and there was a further 16% of the total number of shareholders who did not cast their votes. This indicates that only around 62% of C&W shareholders were actually in support of the resolution. The plan will now pay out in 2011, rather than 2010, so as to take account of market turmoil and a delay in a company demerger plan – both of which are likely to boost the value of the pay-out.

Fred shreds some of his pension

Sir Fred Goodwin is reported right across the media (try, just for a change from other sources, the Scotsman) to have voluntarily agreed a ‘substantial reduction’ in his annual pension, to £342,000 from £555,000 (the £700,000 figure widely reported seems to be the figure of his total pension, including an annualised figure in respect of his £2.7m lump sum, which he has already taken). The reduction in total pension is in the order of some £4.7m – a fall of just over one-quarter on the £16.9m estimated to be the total value.

Nevertheless, this still leaves him comfortably better off than he would have been if he had been paid a pension from 60 – the Royal Bank’s normal retirement age – based on service up to that date, as opposed to receiving a pension paid up to age 60 but drawn from age 50, which has been the case since he left employment (NB Robert Peston at the BBC has some maths which ‘prove’ differently). This still sounds like a reward for failure to me, as well as one which is substantially different from the treatment that ordinary employees would have faced in comparable circumstances. I’m naturally suspicious of witch-hunts – and there are plenty of elements in all this which describe it as such – but I’m even more sceptical where rules are transparently being applied to workers on a differential basis depending on their hierarchical position, and that’s clearly what we have here.

Agreement seems to have been brought forward as a result of Sunday papers reporting his £4m hideaway in the French Riviera, although part of the reason for Sir Fred being willing to reverse his earlier, adamant stance that he would not return some of his pension appears to be the result of an internal RBS inquiry which concludes that Sir Fred’s conduct did not justify a reduction in his pension (defined benefit pension schemes do sometimes have rules allowing for reductions in pension where there is fraud, negligence or gross misconduct). Political support for the move as ‘the right thing to do’ has already been forthcoming, so it looks like we’ve reached the stage of ‘settlement reached…. time to move on’.

Sir Fred’s status in history is already assured but the move may indeed help focus the Royal Bank’s energies on resolving its future, not least on behalf of the staff who remain in the company. This would no doubt be a worthwhile result, although Unite, which represents members in the bank, has contrasted his ‘diabolical failure’ with the comfort that will still be afforded to him on the reduced terms.

A more than fair farewell pop, in the circumstances.

Revised and expanded since first being posted.

Thinking about executive remuneration

Robert Peston, the BBC’s commentator on business affairs, has today blogged about executive remuneration amongst the country’s largest companies – a bit of a theme for Connected Research over the last week or so.

Amongst the gems that Peston reports are that:

– the median (mid-point, ranged from lowest to highest) total remuneration package for FTSE100 chief executives in 2008 was £2.6m, while the 2008 cash bonus was unchanged, at £514,000

– the mean rise in the remuneration package for executives in 2008 (2%) was lower than the median rise (7%): this is likely to mean not only that the figures were not affected by a small number of large rises (at least, none which had a distorting effect on the overall figures!) – but also that, at the same time, it is the vast mass of executives that have done well: proof that, on the one hand, a rising tide does lift all boats equally…

– over the last ten years, average chief executive remuneration amongst FTSE100 companies has risen by 295% while the average earnings of ordinary employees have risen by 44%, leading to a rise in the ratio of the pay of the average chief executive to the average worker from 47:1 to 128:1.

Or perhaps, on the other hand, it’s proof instead of a different proverb: that there is indeed one rule for one and one for the rest.

Peston argues that this largesse has accompanied the large-scale destruction, not creation, of wealth amongst FTSE100 companies  – an undeniable point, in the current circumstances, even if his measures of that are somewhat open to criticism. The gap in rewards between boardroom and shopfloor is of a sickening nature, by itself, and this is made worse by the extent to which it is a growing one. Given that executive pay is determined by and within the executive club, and that institutional shareholders seem patently unable to exert control over that process, even in times of executive failure, perhaps the time has come for legislation setting a maximum ratio of chief executive pay to that of the average employee. Corporate executives should not be exempt from the desire to hold public figures more accountable which has emerged in recent weeks and, if the existing mechanisms of control are inadequate, legislative ones may provide a suitable alternative for an agenda based on establishing social justice.

After all, it is our money – as future pensioners – which is being gambled away and the failure to exercise control over that process is one that is, ultimately, vested in large part in those who have investment responsibility for our pensions.

BT board pay

The publication of the full BT Report and Accounts for 2008/09 brought with it details of the company’s remuneration policy towards its executives: a move which will be of great interest to Connect members this week given what is happening to the 2009 staff pay review.

The press have had something of a field day: see, for instance, The Guardian here and here. The company’s granting last June of a 700,000 Euro ‘retention award’ to Francois Barrault, former head of the company’s troubled Global Services unit, only to be followed four months later by asking for his resignation, accompanied by a handsome pay-off worth £1.6m, was perhaps not the smartest of things to do. The company’s former chief executive, Ben Verwaayen, whose departure looks to have been done with Teflon timing, also pocketed a £300,000 cash bonus in respect of his two months work for BT this year as well as a contractual termination payment of £700,000, even though he left the company voluntarily. BT executives also received the usual range of fees and allowances the presence of which is, in times other than these, somewhat less remarkable.

Such excess is an easy target, however. The serving set of executives appear to have adopted, if not quite sackcloth and ashes, then at least the appearance of a, perhaps relative, ascetism: the second stage of previously agreed wage rises (in 2007/08) to take executives to the ‘market rate’ (interesting notion, this one) is being deferred in the light of the ‘current difficult market and trading conditions’, while increases in on-target bonus levels due this financial year have been put back; the bonuses that are being paid (to three executives) are being paid not in cash but in the company’s shares, which have been experiencing a rather declining value relative even to that of other shares; and Hanif Lalani, the company’s former finance director who replaced Barrault at Global Services in October, has declined any bonus at all.

The accounts contain an interesting reference to executive remuneration taking into account the pay and employment conditions of employees elsewhere in the group: a reference, no doubt, to the pay freezes being put in place for staff. Nevertheless, it is only a partial reference. Being paid in shares or no, the three other executives (chief executive, finance director and Retail director) are still receiving a formal annual bonus, in addition to deferred share-based incentives, not the ‘recognition awards’ being paid, outside Global Services and on a reduced (compared to bonuses in previous years) and currently rather opaque basis, to Connect members. Subject to continued employment in three years time, those deferred bonuses which have been granted to executives this year will also become available. So there are still different rules for the select few, then.

Shareholders will be voting on the remuneration report at the AGM on 15 July.

BA chief to work for free

Announcing record losses for the 2008/09 financial year, British Airways chief executive, Willie Walsh, and its finance director, Keith Williams, have declared that they will work for nothing during July.

The company has launched a range of cost-saving work options for staff, including unpaid leave and part-time working; Walsh said that he wanted neither but that, in the interests of making ‘a contribution in recognition of the extremely challenging position we face’, he and Williams would work for nothing during July – essentially, therefore, an 8.3% wage cut in their respective £735,000 and £440,000 basic salaries.

Aside of the implicit gimmickry – it  is indeed a stunt, which fact is rather confirmed by Mr. Walsh’s protestations to the contrary – this not only sets a poor example but could, in extreme circumstances, lead to implicit or explicit pressure on other employees to follow suit, or otherwise to match the ‘contribution’. There are enough bad examples of bad boardroom behaviour as it is, but if Walsh really feels that he’s not worth the agreed salary for the role, he should seek a role elsewhere more in tune with what he feels are his capabilities.

Back in the real world, BALPA, the union for BA pilots, commented that it would be seeking to ‘continue to work with the company to try and find solutions which will mitigate the effects of the economic downturn on our members. In particular, we will be seeking to avoid any compulsory measures.’

BA has lost 2,500 jobs since last summer and commented that it it was in talks with its unions over ‘pay and productivity changes’. There is as yet no word as to whether such talks encompass pay and productivity in the boardoom.

A word in your Shell-like…

Extraordinarily, in two meetings held simultaneously in London and The Hague, Shell shareholders have voted down the company’s remuneration report: just less than 60% of shareholder votes (around 1.9bn) rejected the company’s remuneration report on the basis that it gave bonuses on a ‘discretionary’ basis to directors despite missing performance targets. The Guardian‘s report also comments that there were other shareholder rebellions elsewhere today on the issue of executive remuneration and that the Shell one – while the largest – was not even a recent precedent.

Well, good on yer!

At the same time, we might wonder why such shareholder rebellions, and shareholder activism in general, are so rare (not least when the large part of shareholder institutions are pension funds representing you and me). Perhaps one of the good things that will eventually come out of the drawn-out furore over MPs expenses is that we can – and should – hold people in positions of authority to account more often than we do. I look forward to this happening on a much more regular basis – and carrying some meaning when it does. Though I won’t be holding my breath.

Shell said that it took the vote seriously and would be meeting its shareholders further. What will transpire there is anyone’s guess. In the meantime, Shell executives, who don’t have to return the money despite the shareholders’ rejection of the report, since the vote is advisory only, are clearly in something of a bind as a result and were, no doubt, last heard having muttered conversations with their lawyers…