Why board pay needs Viking raid
DELIVER us, oh Lord, from the fury of the Northmen! So went the reputed prayer of Dark Age monks fearful of murderous Viking raids. It may soon become a phrase heard in boardrooms up and down the land.
Norway’s vast sovereign wealth fund has weighed into the longrunning row over excessive boardroom pay and I, for one, welcome its arrival.
Crucially, the intervention of the Norwegian state fund is focused not entirely on the sheer CITY EDITOR amounts that some executives are paid, but the opaque and complex payment plans that underlie them. The message of the Norwegians? Keep it simple.
The fund’s intervention is also welcome because of its great size. Managing almost a trillion dollars worth of investments, its clout as a shareholder in hundreds of companies is not to be trifled with. It holds around £45 billion worth of UK shares including holdings in most of our largest companies from banks to insurers and retailers and house builders.
But the real value lies in its very direct message: scrap complex long-term incentive plans. Executive pay has for too long been so opaque under these schemes that even seasoned observers find it hard to disentangle exactly what executives’ targets are and, more importantly, whether they are the right targets to most benefit other shareholders. The more complicated schemes also make it easier for boards to game the system by tweaking one or other complex target measure to deliver a big payout for executives without necessarily creating long-term benefit for the company and its other shareholders.
The Norwegian fund wants these complex schemes replaced with something that is still longterm but far more straightforward – rewarding executives with shares in the company they must hold for at least five or, perhaps, even ten years, even if they leave. This simple system would mean executives would be forced to think about whether their leadership was creating genuine long-term value.
A cap on maximum pay agreed by shareholders, and which need not be uncompetitive, would also stop unpleasant surprises.
Too often shareholders see the report on their chief executive’s pay and exclaim: ‘How much?!’ A simple cap would avoid such shocks and the damage they can do to trust and confidence.