Cameron Steps Into Boardroom Pay Battle

Published in Investing on 9 January 2012

The government is promising to do something about excessive directors' pay, but will it have any effect?

Those who are outraged by the inflated salaries that some of our top company directors are awarding themselves, while shareholders are stuck with mediocre performance, appear to have a possibly unlikely new champion in the form of the Prime Minister.

In a survey of 87 of the FTSE 100's constituent companies, the Institute for Public Policy Research found that chief executives take home total remuneration deals averaged £5m, a 33% rise on the previous year. That comes on top of a High Pay Commission finding that bosses' pay at some of our top companies has risen by 4,000% over the past 30 years, during a time when average workers' pay has grown by only 300%.

Few would raise their eyebrows at bumper rewards for bumper performances, but that's just not what we are seeing; bosses are continuing to pad the lining of their pockets while we're in one of the worst economic slumps for decades and the valuations of our companies are stagnating.

Enter the PM

And now David Cameron has stepped into the ring, promising that shareholders will get a binding vote on the size of the rewards they hand over to the people they employ to run the companies they own.

Talking of a market failure, and recognising that some directors are worth their money, Mr Cameron told the BBC that some were "taking money from the owners of the companies and from pension-holders and the employees".

There could be legislation as early as the next Queen's Speech, and wresting the power to decide boardroom pay from the directors themselves and handing it over to shareholders has to be a good thing. But will it work?

The big problem is that individual private shareholders tend to be in a very small minority when it comes to our major companies, with institutional investors -- fund managers, pension funds, investment banks, and so on -- holding the lion's share. And the long-standing City habit of just rubber-stamping whatever pay deal happens to be on the table might be a difficult one to break.

Why rock the boat?

After all, if you're managing someone else's money and motivated by your own short-term commissions rather than by the long-term rewards enjoyed by your customers, where's your incentive for rocking the boat? Voting out pay deals is not going to gain you any competitive advantage over rival investment managers, who'll most likely have their funds invested across the same range of companies.

Currently, shareholders have only an advisory role to play in deciding pay awards, and there's rarely a voice raised in protest from the big institutions, so it's perhaps a little naive to assume that they'll suddenly find their voices once they actually have some power to make changes.

But does that mean small shareholders will forever have no say in the running of their companies? Not at all, as there is a growing grass-roots revolution building steam, partly through the communicative and organisational power made possible by the internet.

Community power

Outrage over directors' pay is a regular topic on the Fool's own discussion boards, as a recent thread covering the AGM of the small property investment company Conygar (LSE: CIC) demonstrates, and it shows the increasing power that smaller shareholders can wield when they get themselves organised.

So go to AGMs, ask questions, voice complaints and don't just sit back and be quietly ripped off. And join ShareSoc, the UK Individual Shareholders Society, which says "...private shareholders are hampered by poor laws, lax market regulation, ignorance of your needs by the Government, high taxation and by disdain from the companies in which you invest in some cases".

This is true, and it will require changes in legislation. How effective the government's latest plan will be remains to be seen -- we'll have to wait until we see the details, and even then it will depend on the effect it has on the back-slapping old boys network that is the City. But it's a start, and we should probably expect a future Labour government to take things further.

What do you think? Will the Tories' proposal have any teeth? Feel free to share your thoughts, below.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

hughWebber 09 Jan 2012 , 2:44pm

First up for any qualifying bonus the company should be in the upper quartile in performance for the sector and should have increased the dividend payout.

TrafficCop 09 Jan 2012 , 2:46pm

David Cameron's comments over the weekend were well put, and it's good to see the Government is seriously considering legislation, particularly on making remuneration votes binding. Some folks have suggested this is impractical but that is nonsense - it is done in other countries. Other people have said it won't be effective to control pay and they would be right on that if that was the only thing that was done. It needs shareholders involved in setting pay, i.e. a majority effectively on the remuneration committee as ShareSoc has suggested, with strong involvement from real stakeholders (such as private shareholders). Institutions also need to be encouraged to take an active interest in remuneration issues and vote on them, which they often do not at present. Lastly, better reporting is needed so that people can see what is being paid and why.

Roger Lawson, ShareSoc

Benatar 09 Jan 2012 , 3:21pm

The theory of shareholders OKing director fees is fine. In practice major shareholders in plcs may be Investment Trusts, which are themsleves plcs; & whos directors like to see director salaries as high as possible to justify their high salaries.

snoekie 09 Jan 2012 , 4:32pm

This power to challenge directors pay is already enshrined in law, but small shareholders (and I am one of them) rarely vote against pay/bonus packages. I do do as a matter of routine for some years no when I see the telephone/foreign telephone number salaries.

Besides which, the majority of shares are probably owned by institutions, including financial institutions and if they vote for restraint, are they not also limiting their pay, have no big benchmark to follow?

A gigantic rise over the last 20-30 years, far, far higher than the basic wages of blue/basic white collar workers - tooooooooooooo much.

KestonMark 09 Jan 2012 , 8:14pm

Congratulations to Roger, David and Mark at ShareSoc who have worked really hard on these remuneration issues at Halfords and now Conygar.

Shareholders can do very little individually but as a large powerful group they can stand up to these greedy directors who think it is their own private company not a listed one that has raised hundreds of millions of pounds.

ShareSoc is free to join and deserves our support.

UncleEbenezer 10 Jan 2012 , 1:41am

This is a good signal for government to be sending. I'd expect it to strengthen the hand of shareholders in the worst cases - the kind of thing sharesoc takes up. And perhaps help rebel shareholders recruit support in borderline cases.

An open question is whether it'll have any dampening effect in the middle: companies that are neither triumphs nor disasters, but whose directors might think they deserve market-topping rewards.

salmo365 10 Jan 2012 , 4:36pm

There should be some link between director pay and the pay of the company's employees.

The trouble is you are never going to get these fat cats to take a pay cut. These procedures were needed several years ago.

ukdt 10 Jan 2012 , 7:29pm

It may have been needed years ago but you have to start somewhere !

I received another Press release emailed by ShareSoc this afternoon so they are campaigning vigorously. Strike while the iron is hot as they say.
The institutions need to tune into what is happening or the funds will dry up as investors realise they are to blame with their passive investing rather than strong stewardship.

RobinnBanks 11 Jan 2012 , 2:03am

I can just see investors on £20k salaries telling directors that they can only have £4 million instead of £5 million this year! Even MPs set their own salaries and expenses, and usually vote themselves an increase shortly after being elected. The gap between these figures needs to be narrowed greatly, but can ShareCam do it?

ukdt 11 Jan 2012 , 10:44pm

The gap between these figures needs to be narrowed greatly, but can ShareCam do it?

RobinnBanks,

Oooh I think you mean ShareSoc.

ShareCam is something you probably do in the privacy of your own home LOL

You can find ShareSoc at www.sharesoc.org





RobinnBanks 11 Jan 2012 , 11:29pm

@ukdt:
ShareCam is modern short-parlance for ShareCameron, as SamCam is short for Samantha Cameron, SuBo short for Susan Boyle, and J-Lo for Jennifer Lopez; however, Pete Docherty does not shorten very well! (:-o)
What I share in the privacy of my own home is certainly not a Camcorder, but thanks for the webaddress.

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