At last, an end to excessive boardroom pay? Not likely

    21 May 2016

    Patricia Cross wants to kill complexity. As chairman of the remuneration committee of Aviva, the insurance business that older customers still know as Norwich Union, she is well placed to do so. She needs 15 pages of the annual report to explain how the company’s current remuneration policy works and why the total pay of chief executive Mark Wilson was £5,670,00 last year — twice the £2,600,000 he got in 2014.

    This year ‘our progress in developing our digital capabilities and interfaces will be foundational [sic] for our future profit growth’, so 25 per cent of the executives’ ‘annual bonus scorecard will therefore be linked to our progress on the expansion of a digital interface with our customers’. As for the rest, ‘non-financial modifiers, risk, conduct and individual performance will also be considered’ along with financial performance.

    You can hardly count all the weasel words in this glutinous alphabet soup — sorry, ‘remuneration ecosystem’ — which essentially means that executives should receive their bonuses even if the sky falls in. Smiley Ms Cross signs off her missive to shareholders with ‘I welcome any comments you may have.’ Well, perhaps not this one.

    It is slightly unfair to pick on Aviva — the charismatic Kiwi Wilson is an improvement on his predecessor, and the shares have doubled in recent years, though only to half their price of a decade ago — since its almost meaningless remuneration report is typical of today’s FTSE100 company. As BP proved last month, the average chief executive is not about to share the shareholders’ pain. We were told that Bob Dudley’s £14 million package was justified because he had done jolly well on safety, and it was hardly his fault the oil price collapsed. It’s something of a stretch to imagine him refusing a bonus had the oil price doubled, even though he would have had no more influence over it.

    Complaints over executive pay are nothing new. Legislators tried to foster restraint by imposing transparency, which only encouraged remuneration consultants to tell boards their CEO was underpaid. To ensure that he gets his money, consultants present remuneration committees with schemes that make mobile-phone tariffs seem simple. The average big-company boss may need his own remuneration consultant to explain precisely why his last pay packet was the size it was.

    The whole process has degenerated into meaningless ritual. The accounts reveal his pay, the small shareholders rant, rave and turn up at the AGM. They cast their personal votes but are overwhelmingly defeated by proxies sent in beforehand by institutional shareholders (including the likes of Aviva). These block votes are cast on behalf of the beneficial owners — pension- and policy-holders — but it’s hardly in the interests of the fund managers concerned to vote against excessive pay. The sums may be uncomfortably close to their own, which they are grateful they do not have to disclose.

    However, there are stirrings of revulsion, if not open revolt, among even the nstitutional shareholders. Last year almost a quarter of votes were cast against HSBC’s remuneration report, a result that reflected the ire of fund managers as well as real shareholders. The board cut pay in response, and this year’s resolutions were passed overwhelmingly.

    BP has a bigger challenge. This year’s majority against Dudley’s giant award was ‘advisory’. If there’s a similar vote next year it will be binding — but he’s unlikely to turn up at the meeting in sackcloth and ashes. He will have the advantage of what analysts might describe as an ‘easy comparative’: he could suffer a 30 per cent cut and still take home £10 million. He might not even have to speak, assuming that the invisible man of big oil, Carl-Henric Svanberg, is still BP’s chairman.

    Paul Myners, who knows something of the dirty little secrets of fund management from his past in the trade, described the BP vote as ‘a defining moment for institutional shareholders’. They must, he wrote to the FT, ‘show beyond all reasonable doubt that they can be trusted with the fiduciary powers we place in their hands and bring an end to unseemly greed, taking necessary action on behalf of those whose savings they manage.’

    As a minister in the last Labour administration, Lord Myners helped draw up the rules that are producing today’s votes. Far from curbing corporate greed, these rules have effectively allowed executives to hide in plain sight, behind reports that are at once comprehensive and incomprehensible.

    It’s possible that pressure for restraint will, over time, curb the excesses. It’s also unlikely. As one adviser put it some time ago: ‘The average chief executive has a short life at the top. If the choice is between giving up a million-pound bonus and a bad day in the financial press, what would you do?’