The Naked Engineer – Curbing reward for failure

Posted on 4 Jan 2012

This month NE strips down government proposals for executive pay controls and exposes a flawed complexion to relationships between institutional shareholders and FTSE CEOs.

Excessive executive pay has been in the news recently, with Nick Clegg committing the Government to a crackdown.  Bankers still pay themselves large amounts, while FTSE chief executive pay shot up by over 40% last year.  So the politicians are considering three measures.  First, shareholders need to become much tougher on approving executive pay.  Second, accounts should disclose top to bottom pay ratios, and in the case of banks, show the compensation of senior managers not on the board.  Third, workers should sit on remuneration committees or have a secret ballot to vote on bosses’ pay.

These are tough proposals, but with the spectacle of a Pharisee class gorging on the cookie jar, they are necessary.  Some of the worst offenders are, surprise-surprise, those in the financial services sector, the “unrepentant rescued”.  If you want to make widgets, work with widgets.  If you want to make money, work with money – particularly if it is somebody else’s or the taxpayer’s.

We all know about bank executives looking after themselves, but don’t forget pension fund managers.  As institutional shareholders investing in Britain’s top companies, they are charged with the responsibility of monitoring executive pay. But when you’re overcharging savers for running their pension funds and investments, taking 1% or more a year for sitting on their assets, plus fees for trading them to and fro, you’ve got a lot of cash coming in.  You lose perspective.  It encourages a Faustian Pact between institutional shareholder and FTSE CEO.  “Do whatever it takes to boost your short term share price, and in return, I won’t stop you paying yourself way too much”.

In this environment, you can forget supporting long term capital expenditure and national growth.  It’s all about misappropriating the cult of shareholder value into looking good for a few years.  Would you expect manufacturing companies to do well in this particular game, with their 20-30 year decisions on factory and plant investment?  The answer is “No”.  You only have to look at how many large engineering companies we have left on the stockmarket, or the UK’s Balance of Trade, to see the evidence.

So we should welcome the proposed executive pay reforms, but it’s only a start in properly reforming the system.  High fees for running pension funds, which reduce everyone’s retirement income, need to be regulated down to what is normal in other countries.  The tax deductibility of corporate debt – which encourages excessive borrowing – should go, to be replaced by a reduced rate of Corporation Tax.  We might even end up with a national comparative advantage in conservatively financed businesses.

Just like the Taliban have hijacked Islam, so the short termists have hijacked Western Capitalism.  There’s nothing wrong with the underlying religion, it just needs to be allowed to flourish properly.  We now need to put it right.