Oh dear! Oh dear! – Have we learned nothing about executive pay?

The world is going crazy – or at least it seems so. Despite all the fuss about executive pay – nobody with the power to act appears to have the guts to challenge the proposed executive package for Stephen Hester at RBS (reputedly worth £9.6m)

I agree with Roger Lawson, of the UK Shareholders Association who said: “The Government doesn’t seem to have learnt anything. Such a package incentivises reckless behaviour and encourages risk taking. It is absolutely outrageous that the Government does not use its power to bring the remuneration of bankers in these companies down to a reasonable level. Do they need to pay him this much to make him work harder?”

But there’s an even deeper issue here. Namely that the senior executives who are setting pay packages continue to believe that Share Price is the best benchmark of corporate success. Frankly it isn’t.

Let me explain the reasoning for this departure from the paradigm of “big corporate” thinking.

Share price is based on the market’s expectations of profitability, cash flow and other financial measures. So far so good. But that does not explain how a company is improving the well-being of its various stakeholders.

The share price can rise through cost reductions and yet the staff may be much worse off. Share prices can also rise at the expense of price cuts to suppliers. Or prices can be raised to customers – thereby giving bigger profits and a share price hike… you get my drift? In fact this latter scenario is already beginning to make itself felt in the mortgage sector with institutions raising their interest rates for funding – and this is now being passed on through hikes in Fixed Rate mortgages, even though the Bank of England has kept interest rates at 0.5%

Earlier today I was discussing this false philosophy on share prices with Bay Jordan – a South African Accountant based in the UK who has an amazing take on the value of human capital. His website is here.

We both felt that the present Government (through UK Financial Investments) has missed a real trick in accepting the proposed package for Stephen Hester. Undoubtedly the people at RBS want a top-man to help guide them out of their present mess – and top men command top dollar in remuneration circles.

But UK Financial Investments – as holder of 70% of the common stock – could have insisted on a more radical approach. Instead the boys at the Treasury seem only to want to maximimise the share price to ensure a rapid exit from the holding at a nominal profit to the taxpayer. But wait a minute! Aren’t the various stakeholder’s also largely members of the UK community – and hence worthy of a little more consideration than just a quick return of cash to the Exchequer?

Have we collectively learned nothing from the debacle of the last 9 months?

If you agree then time to start lobbying hard. The boys at Westminster are still on the back foot following the expenses row and know that they need to work harder to earn back our trust. What better time than to extol the virtues of some much more radical thinking about what we will accept (as a society) in our corporate boardrooms and beyond?

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