The Truth about Executive Pay

The Financial Times has today published some extraordinarily revealing comments made by new Deutsche Bank CEO John Cryan:

“I have no idea why I was offered a contract with a bonus in it because I promise you I will not work any harder or any less hard in any year, in any day because someone is going to pay me more or less,” he told a conference in Frankfurt.

Pay in the sector was still too high, he added, and he did not “fully empathise” with people who “say they turn up to work and work harder because they can be paid a little bit more”.

“I’ve never been able to understand the way additional excess riches drive people to behave differently.”

This is nothing new, and similar comments were made Shell CEO Jeroen van der Veer some years ago.

When a CEO already receives a base salary & benefits representing more than 20x that of their company’s median paid employee (which is often the case), are shareholders not entitled to expect that that CEO will work to the best of his or her ability, and not just a minimum of contracted hours? Is it really necessary to “incentivise” them with potential multiples of that already high base salary in opaque bonus and LTIP schemes in order to obtain best performance?

Is an individual whose primary concern is their own enrichment likely to be the best candidate for a CEO role?

The answers to these questions are transparently obvious to me. I raised the matter of outrageous pay at BG Group’s last AGM, where newly appointed CEO Helge Lund had been awarded a truly enormous package of pay & bonuses, far in excess of those offered by his previous employer, Statoil. I got the usual response from the chair of BG’s remuneration committee that they had to pay competitively to attract the best talent. I also spoke to Mr Lund after the formal meeting and he confirmed to me that pay was not his primary motivation for accepting the BG role, but rather that he relished the challenge of leading a world class company which faced challenges and needed new strategic and operational direction.

It is time for shareholders (both individual and institutional) to stand up and be counted: vote against pay policies that can result in bonus and LTIP awards worth multiples of base salaries and against the re-election of remuneration committee chairmen that propose such policies.

ShareSoc has formed a committee to look into these matters and draft a pay policy report. Do let us have your views, by commenting on this post, or emailing our office via the link on our contact page.

Mark Bentley

 

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3 thoughts on “The Truth about Executive Pay

  1. “they had to pay competitively to attract the best talent.”

    I think the attitude that “we must have the best” is part of the problem. By definition half of all CEOs must be below average, but every company wants “the best”, hence they try to outbid each other to get it. With rare exceptions I doubt that companies do need “the best” – someone merely competent who just gets on with running the company may in fact be a better choice than a hotshot with a big package (sic) who makes risky deals to justify themselves. Unfortunately in a PR-driven world I doubt that “we have to pay reasonably to get someone competent” will go far as a slogan …

    Although it seems to be politically incorrect to say so I’m not that bothered about director’s pay compared with their employees – as a shareholder I’m mainly concerned about pay relative to profits. If a significant chunk of profits are going to directors and senior management I have to wonder whether the profit would go down or up if we got people who would accept less.

  2. The FT article highlights the key issue – that high pay is not a motivator. And high pay in directors just sets a target that all employees in the company aspire to, which means more of the profits get diverted to staff from shareholders and it encourages general profligacy in the company and a disregard for costs. It was no surprise that puritans were good business people.

    • High pay may not motivate people to do a job, but in most cases it probably does motivate them to take it in the first place – they may sometimes accept a lower salary for a job they really want but I doubt that it’s common.

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