The latest figures on executive pay are so preposterous that they should provoke uproar. It is now largely hidden from public scrutiny but an example recently published concerns Bob Dudley, chief executive of BP, who was given a total remuneration package of $15.2m in 2014: his basic salary was ‘only’ $1.8m, but his deferred bonus and other share awards totalled $9.8m, up 64%.
It is through devices such as these that pay at the top in business has escalated into the stratosphere in the last two or three decades. Chief executives at the biggest UK companies, according to Incomes Data Services, took home 120 times more last year than their full-time employees, yet in 2000, just 14 years earlier, they received 47 times more. In the US it is even more extreme: between 1978-2013 the remuneration of chief executives rose 937%, more than double the level of stock market growth, and enormously more than the 10.2% increase in the average US worker’s pay over the same period.
All the devices used to restrain executive pay have failed abjectly. Partly this is because their remuneration has become overly complex, with too many cash and share-based awards, long and short-term targets, and a profusion of measures of success, ranging from earnings per share to total shareholder return to return on equity. Share options were supposed to ensure that managers were incentivised to make shares perform well over a long period. But too many executives sold their shares as soon as they exercised the options, thus encouraging excessive risk-taking as executives tried to boost the share price when the options cam due.
Disclosure of top pay also had the unintended effect that it ratcheted up remuneration levels as chief executives demanded that their pay be competitive with their peers. It wasn’t really about money, but rather the status. And consultants hired to tell remuneration committees what best practice was elsewhere only produced greater complexity and opaqueness.
Even non-binding ‘say on pay’ votes in the US and Vince Cable’s binding 3-yearly votes on pay policy in the UK has had little or no effect, despite sporadic shareholder revolts. It is said that business leadership has become an international market and that globe-trotting chief executives deserve far more than sports and entertainment stars. But the latter’s rewards are not determined by a committee of their peers who, like those whose pay they decide, are part of the corporate elite. Footballers’ and rock stars’ pay is determined by the stadiums they fill and the albums they sell. The same principle can be argued that employees as well as shareholders should have a direct say in determining their bosses’ pay, and the restraining influence would be a lot more effective than any formula tinkering by the chief exec’s chums.