Shareholders should rein in executive pay

Employees lack the clout to curb CEO pay and politicians lack the desire. What about shareholders?

When Italian side Juventus signed Cristiano Ronaldo in a €112m deal, Fiat workers laid down their tools.

The transfer of the Portuguese star had been made possible by the Agnelli family, owners of the Turin-based football club as well as the carmaker. It left Fiat employees enraged.

“It’s a disgrace,” one employee told the Italian press.

“Fiat workers have not had a pay rise in 10 years. With Cristiano’s salary we could give every worker an extra €200 a month.”

The unions weren’t happy either…

“It is unacceptable that while the (owners) ask workers of Fiat… for huge economic sacrifices for years, the same decide to spend hundreds of millions of euros for the purchase of a player”

Italy isn’t the only country where people have a reason to hate their boss. In the UK, employees have cause to feel disgruntled too.

The CEO-to-worker pay ratio is getting more embarrassing ever year. Bosses are now paid on average 145 times more than their employees.

Company boards generally don’t heed protesting workers too much, but the same can’t be said of shareholders.

If employees and politicians can’t do anything to curb executive pay, maybe shareholders can.

Same old same old

“Pay for UK’s top bosses climbs 11%, while full-time worker got 2% lift,” writes the Financial Times.

I think I read a version of this article every year. In Corporate Britain, Goliath always beats David when it comes to wage growth.

Just like I’m informed every year that UK bosses on more than £1,000 an hour have already made more money in the first week of January than the average worker will earn all year.

Journalists only have to dig up last year’s piece, update the numbers, and let the country be outraged for a day. Then everybody forgets about it again until they read something similar in another 12 months.

Nothing ever changes.

Still, it’s not really good publicity for a government that supposedly wants a country “that works for everyone, not just a privileged few”.

So it’s decided to intervene…

From 2020 all listed companies with more than 250 employees in the UK will have to publish the CEO-to-average-worker pay ratio and justify the difference.

What a nightmare!

Pardon my sarcasm, but I just don’t see the point of this measure. When has “salary shaming” ever worked before?

I mean public companies already have to disclose CEO pay after which journos do their duty by telling us how much more they get paid than the average worker.

So companies publishing this CEO-to-worker pay ratio isn’t going to tell us anything new.

But wait! They also have to explain the difference. As if we’ve never heard boards defend their CEO’s pay cheque before!

CEOs have complicated jobs that merit outsized compensations…

Companies won’t be able to hold on to the best directors if they don’t pay top dollar…

They make it sound like a game of musical chairs with the number of companies vast and the number of top CEOs scarce.

The only problem is that historical data doesn’t support this. Dutch research on top executive pay between 1940 and 2005 doesn’t show any link between big pay rises and a big lack of able executives.

It’s also not very realistic to suppose that the success of a company depends on the efforts of one individual when a whole host of external factors play a role as well, the academics say.

Should bosses get paid more? Yes.

A lot more? Sure.

But 145 times more is getting a little ridiculous, n’est-ce pas?

Power to the shareholders

How to put the brakes on extravagant executive pay?

One measure would be to tie CEO compensation to a percentage in line with the rest of the staff. If employee wages don’t go up, neither does the boss’s.

It would tie executive pay more to company performance and ensure that pay rewards stay at levels that can be justified to shareholders.

Problem is that no company will voluntarily do something about this while imposing such measures will be a bridge too far for governments.

So basically workers lack the clout to curb CEO pay and politicians lack the desire to do anything meaningful about it.

That leaves shareholders.

As it happens, investors have recently spoken out about excessive executive pay.

At the heart of their concerns lie the lack of transparency in companies’ bonus structures and the suspicion that these bonuses are no longer tied to company performance.

They point to long-term incentive plans (LTIPs), a new type of bonus that no one quite understands but results in higher pay-outs than shareholders anticipate.

The criticism goes that LTIPs are too complex for shareholders and boards to understand. They’re also said to encourage executives to hit short-term targets which could undermine the company’s health long-term.

Paul Drechsler, president of the Confederation of British Industry (CBI), acknowledges that excessive CEO pay has become a “lightning rod for public discontent”.

“Where CEO pay has become disconnected from performance, shareholders should have the power to show the company a yellow card.”

One proposal for shareholders to “referee” companies this way is by giving them a bigger say over executive pay.

Boards would need a “super majority” of 75% of shareholders to support their pay schemes. If they don’t receive this backing, then it’s back to the drawing board before putting a new proposal to another binding vote.

This would give shareholders the power to rein in executive pay.

It still might take a while before it gets to that, however. And even if it were implemented, it’s not clear whether it would actually put a stop to out-of-control CEO pay.

At least the growing pay gap between boss and average worker has given people on social media some creative ideas:

“Imagine a reality show in which CEOs have to live off their lowest paid employee’s salary for a month.”

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