Pension Funds & Executive Pay

John Griffin

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There has been much chatter in recent days about the Government’s effort to crack down on excessive boardroom pay.  Coincidentally (or conveniently?), we’re also approaching the annual bonus season at the big banks.  Now, I’m not suggesting that the inevitably lower banker bonuses will be claimed by the Government as evidence that it has found a way to tame the excesses of executive pay, however …

Sticking with the facts: most banking profits come from investment banking, and profits will be down.  Bonuses will, therefore, fall.  Although this will result in a significant fall in dividends for shareholders, somehow executive pay, although perhaps reduced, will fare much better. 

For example, although Barclays has been one of the better-performing banks in the last three years of crisis, it hasn’t earned returns in excess of its cost of capital, a basic measure of success at any company seeking to make profits.  Strangely, however, last year 231 key staff earned an average of £2.4m each – and that doesn’t include the Chief Exec’s able right-hand men who each earned £10m.  And I won’t even mention Bob Diamond (again).  Barclays share price has fallen by almost a third in the last year.  How? Why? What?  Nice work if you can get it.

Surprisingly, shareholders overwhelmingly approve these remuneration policies.  Why do they continually vote to approve these pay-deals for the executives, at their own expense?  They have largely swallowed the hokum that big bonuses are needed to retain and attract high quality employees.  This is, of course, nonsense, perhaps more so now than ever before; there have been lay-offs in the last year or so, and competition for investment bankers is almost non-existent.  Introducing a binding vote for shareholders – although welcome – may not, therefore, make a significant difference, at least until it is realised that investment banking Emperors’ new clothes are not quite covering their assets.

This isn’t just another excuse – do we need one? – to bash our loveable bankers, but what has this to do with pensions? Well, perhaps it’s time for institutional investors such as pension funds to become more involved, and engage in executive remuneration.  Investors have been royally ripped-off for years.  If big shareholders can’t grasp this opportunity to bring a halt to this rip-off, then when can they?  Maybe it’s too easy for the large investors to wash their hands of the murky dealings and delegate such matters to asset managers.  And what of the asset managers?  They have been strangely reluctant – I wonder why? – to vote down any pay proposal packages; just a thought, but maybe the fund managers themselves should be forced to disclose their pay packages?

Business Secretary Vince Cable is already making encouraging noises about his proposed changes; for example, he seems to have set his sights on the back-scratching merry-go-round of company executives sitting on each others’ boards and rubber-stamping unjustified increases. 

Mr Cable’s ideas will be published later this month and the Government’s plans will be included in the Queen’s Speech this spring; it is to be hoped that his deeds match his words, or is this too much to expect from a politician?