Allister Heath
Investors should be trusted to regulate executive pay
When it comes to corporate governance, one fact matters more than any other. The average FTSE 100 CEO annual pay packet was slashed by a remarkable 17pc last year: in a dramatic move, shareholders decided to flex their muscle.
Given this hugely important development, it is therefore simply not true to maintain, as almost everybody still does, that the pay of top bosses keeps going up, regardless of performance, at a time when average real pay is stagnant.
The figures suggest the exact opposite: that trend, in as much as it ever existed, is over. Claiming otherwise is to perpetuate a monumental myth to reinforce a false narrative and to push the public into an ever more anti-capitalist position.
The reality is that the system is working, if belatedly and haltingly. Investors in the largest firms had become concerned that top pay had become out of whack, and are sorting it out by writing better contracts for their senior managers and supervising them better.
The figures, from the CIPD, remind us of a fundamental truth about publicly listed companies.
Yes, they are imperfect, especially compared to purely private entities. Yes, they are riven by what economists call the principal-agent problem: the owners (the principals) find it hard to exercise control over their top employees (their agents). Given that their interests often diverge, this is a big problem.
Shareholders are dispersed and find it hard to coordinate; they don’t have much time or the ability to monitor everything that goes on in their business. It is much easier when owners are managers, or when there is a controlling shareholder. But hard doesn’t mean impossible. The system can still be made to work. Owners – even when there are tens of thousands of them and none owns more than a minuscule share of a firm – can make sure that they get their own way.
Needless to say, none of this is enough to convince Left-wing activists. Their latest wheeze is to argue that pay remains “excessive” if the ratio between the top and lowest earners in a firm is higher than some arbitrary number. The number isn’t usually adjusted for industry or company size or geographical spread or anything else; the fact that a CEO is paid 50 or 100 or 200 times (pick your number) what the lowest employee earns is deemed to be self-evidently outrageous.
This has been a supremely successful strategy in recent years and is now contaminating supposedly centre-right Tories. It’s a way of reinventing egalitarianism for the 21st century, and to rejuvenate the Marxist Labour theory of value and the economically illiterate theory of the “just wage”. In all cases, the idea is that outside observers can determine what is the “right price” for something – in this case, labour.
But it’s nonsense: prices are determined by markets and go up and down according to supply and demand.
They are a neutral signal about scarcity and commercial value. The fact that a currency trader is paid more than a nurse merely tells us nothing about relative moral worth. They are merely reflections of impersonal economic forces; attempts at paying everybody the same have ended in tears whenever they have been tried by the Soviets or Chinese.
So why is Theresa May still persisting with her attempt at forcing listed firms to publish pay ratios? It will merely add yet more bureaucracy and costs and create yet more disincentives to invest and spend in Britain. It will fuel disquiet and distrust, and damage industrial relations.
A separate, related idea of a register of companies in which at least a fifth of shareholders have voted against executive pay is especially preposterous. The whole point of having shareholder votes is that dissent is possible.
Does the Government think that there should be unanimity on every decision, and that companies with a difference of opinion should be penalised? And what about a company that is hit by a 20pc shareholder revolt one year, and then gets 100pc support the subsequent year? Why should it stay on the register?
The solution is simple: May should do nothing, abandon her latest assault on capitalism and let shareholders get on with their job.
‘The reality is that the system is working, if belatedly and haltingly’