Tuesday, November 22, 2011

Excessive Executive pay is theft from the shareholders & it can be stopped

The dramatic increase in the gap between the highest paid employees and the average pay grade is not just bad economics and worse politics. It reflects a major break down in corporate governance.

The fact is that not only are most fund managers lousy investors- they rarely beat their benchmark, and the majority in recent years have actually lost money for their investors- they are truly appalling stewards of the investments that they make.

Fund managers have been content to allow through any pay request made by the management of the companies that they invest in. These requests come, of course, through the remuneration committees of company boards, which are largely staffed by... ex-executives. Instead of querying the increasingly large sums going to senior management, the fund managers, if they dislike their investment, will simply sell it.

The result is that executives have had little or no scrutiny of their remuneration- it is simply rubber stamped by a bunch of compliant place men. 

Fund managers fail in the fiduciary duty to their investors if they permit management to over pay themselves to this extent. If the government wishes to make a point, they could remind fund managers that they have this fiduciary duty. Meanwhile, individual investors in funds could threaten to sue fund managers that continue to vote for excessive pay packages for senior company employees.

The solution to the robbery of the shareholders by senior management is to force the agents of the investors, i.e. the fund managers, to take the issue seriously. We have the means to impose greater discipline over managements, but the cozy cabal of the City has not been forced to take action. 

Time to do so. Which individuals will lead a class action against the UK fund management industry for permitting this theft to take place?


Sarunas Skyrius said...

I saw a proposal on some blog to limit executive pay by law to 1mUSD per year, UNLESS it is put to a general shareholder vote and is thus increased. If you really really need someone who won't work for 1mUSD, vote so :)

I'm not a fan of (wink wink nudge) nudge libertarianism. Most of the days, anyway.

Jüri Saar said...

When it comes to executive pay there is one more possibility: the tax code used to favore various perks instead of pay in the eighties (and earlier), but this has been gradually reversed and instead of the perks you get the high pay today. Perks are easier to hide, deny and discover. It is more difficult to do the same with executive pay.

It would be interesting to find out what would happen to comparissons of executive pay today and thirty years ago, if we also looked at the various perks and the infuence of the tax code on higher pay.

Cicero said...

In the 1970s, particularly, there were several non cash benefits that were given instead of higher pay, in order to avoid heavy income taxes. In the UK the most popular was the "company car". Gradually non cash benefits were taxed in the same way as cash benefits, and the practice died away. This is why I used the word remuneration, which implies total compensation, not simply salary. However even if we simply consider salary- not bonus or other benefits- the increase is of the order of several thousand percent, so there is no doubt that this is a real and not an accounting or taxation issue.

Jüri Saar said...

Do you think the remuneration problem is worse in the UK than in the US?

Cicero said...

The US does have a wider median gap, but there are a couple of mitigating factors, including that Americans tend to be much more active philanthropists than in the UK.