Higher pay for bosses won’t save stock market

Those arguing for huge rises have got it the wrong way round: better pay will follow better performance but won’t be the trigger for it

It has underperformed the rest of the world’s major indices for years. New listings have dwindled away to almost nothing. And many of its major companies are either looking to move elsewhere, or else selling themselves to the highest bidder. We are all very familiar with the woes of the London stock market. But it turns out that there is a very simple solution.

All we have to do is pay the men, and occasionally the women, in charge loads more money, and everything will be OK. It’s a nice try. The trouble is, it is not going to work.

In reality, the chief executives arguing for huge pay rises are getting this the wrong way around. Better pay will follow better performance – but it won’t be the trigger for it.

It has been another worrying week for anyone following the slow-motion death of the London equity market. Anglo American received a takeover bid from BHP which, if eventually accepted, would mean another major FTSE 100 company leaving. Mike Lynch’s Darktrace announced it was to be taken over by the private equity firm Thoma Bravo. Meanwhile over the past couple of months the pharma company e-therapeutics said it would quit with its chief executive Ali Mortazavi complaining the market was “completely broken”, while the likes CRH, Reguson and Tui have all departed. A listing in London of the Greek industrials conglomerate Mytilineos, a rare move in the other direction mooted last week, with all due respect to the company, hardly makes up for all those losses.

And yet it turns out that there could be a solution so simple that it is surprising that no one thought of it earlier. We just have to pay the executives in charge of major listed companies a whole lot more. Over the past few weeks, there has been a row between shareholders and management over the £18.7m remuneration package awarded to the AstraZeneca boss

Sir Pascal Soriot, admittedly one of the more deserving FTSE 100 leaders given the track record of the company under his stewardship.

Likewise, the London Stock Exchange Group has awarded a £13m package to its chief executive David Schwimmer. In both cases, executives are arguing that they would be paid far more if the company was listed elsewhere.

“When you look at standards for compensation around the world, the US is in a different place,” argued Schwimmer. “And that is an issue companies competing on a global basis from a base in London need to take into account.”

The message is clear. Pay us at American levels, or we will shift our listing to New York, where no one will mind at all how much we take home. And London pay levels will have to be competitive to keep companies here.

In fairness, it is a clever tactic. The London market is in such a febrile state right now that almost anything that will keep a company listed in the UK will be waved through by shareholders worried that very soon they won’t have any London quoted stocks left to invest in (and if that happens who will need a British fund manager). And there is no question that some radical changes will be needed if the London stock market is to survive in any recognisable form. The trouble is, there are two big flaws in this argument.

First, it is a myth that British chief executives are poorly paid globally. Sure, pay packages in the US can be extravagant, but across most of Europe they are far more modest. A 2019 study by Pablo de Andrés of the University of Madrid found that UK chief executives on average were paid 95pc more than their counterparts in continental Europe, while a survey from Lensa found that British bosses were paid more in absolute terms than rivals in the likes of France, Germany and Italy, and also as multiple of the average salary within their company. And yet, Germany’s DAX index has dramatically outperformed the FTSE 100 over the past 20 years, and France’s CAC-40 has done better as well. If those indexes can do well despite not paying their chief executives as well as the UK does, there is no reason why the London market has to increase salaries.

Next, there are plenty of bonuses on offer. No one objects to chief executives taking home big rewards so long as the shareholders also receive excellent returns, the employees are well paid and the company is investing and expanding into new markets. There are already lots of schemes in place, from share options to bonuses linked to profits or the share price, to make sure the chief executive has plenty of motivation – apart from just pride in the job which, come to think of it, should always be the main factor – to deliver world-beating performance. The problem is when chief executives expect to be paid millions for doing nothing more than keeping the ship afloat for a few years and matching the average returns in their industry. That isn’t good enough.

True, we could all make the argument that if we were paid a whole lot more then performance would improve. If the Chelsea squad were paid more than the £154m they collectively earn, perhaps they could win a game occasionally. If the Prime Minister was paid more than £167,000, perhaps he would be a bit better at running the country. If rail drivers were paid more than the current average of £67,000, then maybe the trains would run on time. It is not very plausible.

In reality, the chief executives and remuneration committees have got this the wrong way around. Pay will improve once the London stock market starts to outperform the other major indices around the world. But it won’t be the trigger for it to recover – and the chief executives trying to make that argument are just making themselves look ridiculous.

‘It is a myth UK chief executives are poorly paid – they get more than on the Continent’