A few months ago I appeared on a panel organised by a leading firm of pay consultants, Hewitt New Bridge. The audience, in the City, was packed with ‘human resources’ directors, pay experts and members of ‘remuneration committees’ — the directors who set pay in leading public companies — among whom there was broad acceptance that the current ‘Great Recession’ might require some kind of temporary pay restraint.
But when I suggested that remuneration committees were lazy, easily bullied by powerful chief executives (such as former Royal Bank of Scotland boss Sir Fred Goodwin) and too often cosy cartels where directors engaged in mutual back-scratching, the room erupted. The culture of large annual boardroom pay-and-bonus boosts has become so entrenched that members of the high-pay oligopoly simply don’t get it.
Instead of acting as protectors of shareholders’ interests, pay panels have become captives of the managers and slaves to globalisation. In much the same way that Britain imported subprime mortgages, securitisation and exotic debt instruments from Wall Street, so remuneration committees have adopted destabilising policies from across the Atlantic.
As British-based businesses have become more international in their recruitment, they have gradually joined the American cult of the plenipotentiary chief executive. American bosses have become ever richer in comparison with their workforces. In 1980, they earned an average of 42 times the wage of shopfloor workers. By 2007, this had risen to 344 times. Average pay among top US executives rose to $13.3 million per annum.
Such high rewards in America are regularly used by UK pay committees to justify increasingly lavish signing-on fees, salaries and bonuses. Boardroom rewards have been on the up escalator: a Guardian survey this week found that FTSE100 directors’ pay rose 10 per cent last year while their companies’ profits and market valuations slumped by almost a third.
But at last there are signs that previously supine investors, who failed to challenge the spurious justifications of remuneration committees, are not going to take it any more. Revolts against ‘fat cat’ pay have turned routine annual general meetings into battlegrounds where activist investors exercise their democratic rights. The most significant of these rebellions took place at Royal Dutch Shell — the sort of all-powerful corporation that thinks it can make its own rules. At the company’s AGM in the Hague in May, shareholders representing 59 per cent of the stock voted down the group’s remuneration report. This followed the decision by the pay committee to award five senior directors ‘discretionary’ bonuses despite failure to meet performance targets. Departing chief executive Jeroen van der Veer (the boss who cleaned up Shell after a scandal over its accounting for oil reserves) received a 58 per cent pay rise, bringing his package to £9 million.
The disdain for the Shell board was palpable. One major shareholder, the Scottish insurer Standard Life, sent its governance guru Guy Jubb to the Hague to launch his criticism from the floor of the meeting, a highly unusual occurrence. Most of the venom was directed at the chair of the remuneration committee, former Reuters boss Sir Peter Job. Perhaps this should not be a great surprise. In recent years Reuters (now Thomson-Reuters) has been among the more generous payers of bonuses in the FTSE100, despite some underwhelming performances. Last week Job paid the price for the failure of the Shell pay committee to reflect the mood of shareholders when he lost his job in a boardroom shake-up.
And it will come as no surprise that Bob Scott, head of the pay committee at Royal Bank of Scotland, was among the first to go in the clear-out at the part-state-owned bank. It was Scott (former boss of insurer Aviva), along with chairman Sir Tom McKillop, who awarded Sir Fred Goodwin his famous £703,000-a-year pension — since negotiated down by the new RBS chair, Sir Philip Hampton.
Another non-executive director losing her pay scrutiny job is the ubiquitous Lady (Louise) Patten, spouse of former Tory minister Lord Patten, who was ousted from Marks & Spencer’s pay panel and replaced by National Grid heavyweight Steven Holliday. Patten’s CV includes directorships of Somerfield, GUS and Bradford & Bingley. This and her background in consulting at Bain & Co seem to have failed to provide her with the political antennae to protect her chairman Sir Stuart Rose from shareholder wrath over his bonus promises.
A pattern (forgive the pun) has been set. Other pay committee chairmen in the firing line could include Jonathan Dawson at Next (where performance targets were quietly halved), DeAnne Julius at BP and Kate Nealon at Cable & Wireless, where the awards are in telephone numbers. The quiet complacency of one of the most exclusive clubs in Britain is finally being shattered.