Ask 17 (count ‘em) detailed questions about executive pay, the duties of directors and the composition of boards and you can expect to be overwhelmed by answers that cover little common ground. That is the experience of the business select committee as responses arrive to its corporate governance inquiry. The MPs may regret setting the terms of reference so widely.
The best advice: throw the technical tweaks in the bin and concentrate on the simple ideas. Here’s a proposal on pay that starts from admirably straightforward (and correct) premise that “the executive remuneration system is seriously discredited and needs substantial reform”.
So says the Institute of Business Ethics. It says cash should be restored as the essential currency of paying executives. In other words, abolish share options, performance share awards, deferred awards and most of the padding of modern remuneration schemes. The law should be changed to forbid payments that cannot be valued properly at the time of award.
Salaries would go up, naturally, but the institute proposes a few sub-clauses. First, executives would have to spend an agreed portion of their higher salaries on the company’s shares and then hold that stock for years, even beyond retirement. Second, any salary increase or cash bonus wouldn’t become effective until shareholders had voted. Third, if the executives still wanted big cash bonuses (more than 25% of salary, say), they’d have to give the same award in proportion to all employees, which would be fair.
The main advantage of this approach is that executives would build up a shareholding over time and receive dividends on those shares, which should encourage more long-term thinking in boardrooms. Bonuses, which the outside world rightly regards as a racket because zero is awarded only when catastrophe strikes, would become a side-show. And shareholders would be directly on the hook for what executives are paid.
The practical difficulty is that the public might not like the notion that a FTSE 100 chief executive’s £1m-a-year salary could become £2m-a-year or more once the share-based carrots are scrapped. But the virtues of the system would be simplicity and transparency, which are currently woefully under-supplied.
Indeed, as the institute did not say, there would be another benefit. The small industry of remuneration consultants, which has grown rich by peddling baffling pay schemes that produce perverse results, could be made redundant. Few would mourn its passing.
It’s a bit rich for Tim Martin, the pro-Brexit chairman of pub chain JD Wetherspoon, to complain about how the result of the referendum has created uncertainties for his business, his customers and his suppliers. He might have considered the possibility before distributing beer mats promoting exit from the European Union.
But let’s not be too churlish about Martin’s lively rant about the “hectoring and bullying approach” adopted by Angela Merkel, François Hollande and the man he calls “the unelected EU ‘President’ Juncker”. Behind the rhetoric lies a serious point: British punters drink an awful lot of continental booze.
French wine, champagne and spirits, German beer and Swedish cider are “at extreme risk,” claims Martin, if UK consumers take offence at the Junckerist idea that the country must be punished for leaving the EU. He is surely over-stating matters in expecting a patriotic rebellion by consumers. But the EU tariff system on wine imports to the single market was designed to protect the French industry. Like Martin, the powerful French agricultural lobby will also be very keen for tariff-free trading in food and drink to continue.
Persimmon’s pessimism
Still on Brexit matters, housebuilder Persimmon says the referendum had no impact on its “encouraging” sales over the summer. But here’s the line that will annoy Theresa May as she attempts to boost the number of homes built in the UK: the country’s second biggest housebuilder says it is turning “cautious” on land purchases because of “the uncertainty surrounding the potential impact of the EU referendum result on the UK economy”.
Investment in land and house construction are not the same thing, of course, but nor are they unrelated. The government would rightly be miffed by any sign of a go-slow by a company that enjoyed a 22% profit margin last year, thanks in part to those Treasury-sponsored Help to Buy schemes, and is overflowing with cash. But what could May actually do to give Persimmon and its peers a kick? If she has the answer, she hasn’t shared it.
