A suggestion to help curb pay disparity

The public, politicians and institutional investors all seem to agree that the disparity in pay between the top few and the rest has become too great. According to the High Pay Centre, the average pay of FTSE CEO’s is now 130 times that of the average employee in the same company, up from 47 times in 1998 and less than 20 times in 1980 and the ten highest multiples of FTSE 100 CEO’s range from 250 to a wonderful 780 times for Martin Sorrell at WPP.

Since 2006 annual reports are obliged to include full disclosure of all forms of pay and typically give details of at least 5 separate types of remuneration: fees and salaries, taxable benefits, annual incentives, LTIP and pension contributions. Designed to shame companies into paying less, it appears to have had the opposite effect of allowing easy comparison to enable the NED’s to justify their own CEO’s pay on the basis he should be paid top quartile for his excellent work. I suspect in most cases it is not about the utility of the money earned, it is just a way of keeping score.

There have been other initiatives to control the worst excesses of executive pay, but little progress appears to have been made despite this much greater disclosure of the whole process. Some may even have been counterproductive. For example, the shift to greater emphasis on EPS or share price growth in calculating bonuses has arguably led to short-termism at the expense of long term strategic planning and investment.

I have a suggestion for a simple tweak to the present system of hiring and rewarding CEO’s and other board members. It should be made a requirement that at least three candidates make the shortlist. When the appointment process gets down to those final three they should be asked to say how much they are willing to do the job for, on the stated understanding that the one who is willing to do it for least is most likely to be appointed.

This Dutch auction will hopefully reverse the bidding war that typically occurs. And once in place, instead of the annual review focusing on the peer group and insisting that your appointee has to be top quartile, ask the same question of the incumbent again.

I have no doubt the current participants in the process will explain how unworkable this suggestion is. Head-hunters will hate the idea; their fees are typically a percentage of first year’s remuneration. Non-Executive directors will talk about succession planning and the importance, if not necessity, of getting the right person. I counter that it is mostly self-interest that perpetuates the current system. Also, there is now a considerable weight of research to suggest that the success or otherwise of CEO’s is mostly down to luck. If that is the case let’s pay as little as possible to find out who is going to be lucky.

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    Welcome to my website. I'm Gregor Logan, an independent management professional with over 35 years of experience in all asset classes, including equities, bonds, property, private equity, alternative assets and bonds. I previously held senior-level roles at MGM Assurance, Pavilion Asset Management and New Star Asset Management.

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