Pay deals rotten to the core

MALUS and Clawback: they sound like a pair of Bond villains. In fact, they are the deeply ineffectual means companies have to try to seize bonuses back from bosses who don’t deserve them.

The influential Lex column in the Financial Times suggested, with respect to Thomas Cook, that penalising executives because they turn out to be useless amounts to a tax on disappointment.

The FT was being sarcastic, but many might say: why not?

Is it really any more ridiculous than the system we have, which spews out enormous rewards for executives, regardless of their incompetence, regardless of how many billions of pounds of value they destroy, and heedless of the harm they inflict on others?

Bonuses are meant to be the bosses’ reward for delighting investors, not for letting them down horrifically.

And as disappointments go, the demise of Thomas Cook is a big one – for the 9,000 employees now without a job, for thousands of stranded holiday makers and for small shareholders whose investments are worth nothing. Rewards are of course linked to share performance so Peter Fankhauser, the current chief executive, will lose out. He has incentive awards that might have delivered around £4m but are now worth nothing.

That’s got to hurt, but he still received millions in salary, benefits and pension contributions over his years at the helm – just over £1m, not counting bonuses, in 2018 alone.

Harriet Green, his predecessor, received almost £11m and the one before her, Manny Fontenla-Novoa, took home around £16m over five years.

MPs on the business select committee are looking at executive remuneration as part of their investigation into the affair.

Grant Shapps, the transport secretary, has suggested directors might have some of their ill-gotten gains repossessed. Don’t hold your breath. Our friends Malus and Clawback were initially introduced in the aftermath of the financial crisis, at first just for banks but now for other types of business.

There has been no shortage of scandal since, but the powers have barely been used.

Malus – the opposite of a bonus – is in theory the easier of the two, because it involves removing incentives before they have actually been paid.

CLAWBACK is more difficult as it involves the tricky task of prising awards out of the sticky hands of executives after they have been received.

In practice, of course, it is incredibly difficult to get rewards back even when it turns out they were utterly unmerited.

It didn’t happen in the downfall of Carillion, a huge and toxic collapse, and it probably won’t at Thomas Cook either.

Bizarrely, the fact a company has gone into liquidation does not necessarily prompt Malus or Clawback.

Indeed, at Carillion, there was a change to policy shortly before it went to the wall, removing a provision that it could demand the repayment of bonuses in a corporate collapse.

At present, the only triggers are gross misconduct by a director and the mis-statement of the company results.

Attempts to strip bosses of bonuses are also open to challenge in the courts. Eric Daniels, who was the chief executive of Lloyds during the financial crisis, won a legal case a few years ago that resulted in the bank being ordered to pay him a £1.4m bonus it had withheld.

What can be done? Malus and Clawback rules could be beefed up so they are automatically brought into play when a company fails. The burden of proof could be placed on the director to show why he or she should keep their bonuses.

Far better, though, if overblown awards were not made in the first place.

The top pay culture in the UK is rotten. This is down to cosy relationships on boards, toothless remuneration committees and consultants and headhunters who have a vested interest in pandering to venal executives.

It harms capitalism if top managers cash in despite the demise of the companies they run.

If companies and shareholders won’t tackle the outrage, voters might take the view that Jeremy Corbyn will.