Via Simon Caulkin's enjoyable little rant in today's Observer business section, I came across an article in Economist from a week or two back on regulatory efforts to intervene in respect of pay in the finance sector. Now I'm sure this will come as a major shock to you, but the Economist is NOT in favour of such intervention. Yet despite (as usual) not sharing their perspective, they do (as usual) make some good points. Here's one:
"If the foolishness of Congress setting corporate pay levels is an old lesson, the financial crisis is teaching some new ones to shareholders. First, forget the received wisdom that paying people in large amounts of shares in their own firm ensures they take sensible value-maximising decisions. In the collapse of Lehman Brothers and Bear Stearns, the management did not just take reckless gambles with other people’s money. Dick Fuld and Jimmy Cayne took reckless gambles with their own—and still they failed to do the right things and ended up losing most of their fortunes."
Amen to that, but they don't really sketch out any alternative (though they give a thumbs up to the FSA/Nick Drew(!) plan of linking remuneration to capital adequacy). I think Caulkin is actually more on the money by arguing that current events demonstrate that performance-related pay is incredibly difficult to get right.
"The credit crunch has written it out in huge red letters: incentive pay may work for Chinese peasants, but in situations of any complexity, and especially where the quality of the decisions made is only apparent in the long term, pay that truly reflects performance is not only unachievable: the attempt to make it so is catastrophically counterproductive."
To finish off, here's the final line from the Economist article:
"But in the end companies and shareholders are better at setting salaries than bureaucrats."
At what point are we going to acknowledge the very simple truth: shareholders do not set executive pay. At best the big institutions get prior consultation on particularly controversial proposals in order to try and prevent an embarrassingly high oppose vote at the AGM (though even then only a tiny proportion of companies even lose the vote). Most often shareholders are simply rubber stamping what companies tell them they want to do.
And even in this largely reactive role shareholders haven't don't a great job. If remuneration policies within banks were, with hindsight, so obviously flawed, then presumably shareholders must have voted down the remuneration reports at the likes of RBS, HBOS, Lloyds TSB? Er... no. Not even close. Not a single bank has even come close to losing the vote on its rem report. As Caulkin says, if shareholders are "better" at "setting" pay than regulators, then what does "worse" look like?
As I've argued plenty of times before, the idea that "shareholders" do/will/want to act like owners, and as such play a useful role in executive pay oversight is misplaced as things currently stand. Unless we address the failure of ownership in the public company model this is unlikely to change. Those from the Right who continue to argue that pay must solely be a matter of companies and shareholders are therefore either ignorant of reality or deliberately advocating a weak oversight mechanism. Either way it's an argument that needs challenging every time.
PS. In case you were wondering about the lack of links, I've knackered Firefox somehow and my replacement browser doesn't let me make hyperlinks in Blogger.