The former CEO of the Investment Association, the trade body that represents UK investment managers, has made a disruptive proposal on CEO pay.
Decades of technocratic effort by corporate governance experts has had unintended effects. Pay levels have “gone through the stratosphere” with “ever more complex” arrangements.
Daniel Godfrey’s proposal is simple and radical: a salary-only model, incorporating shares. Such a system would:
In return, boards would explain their thinking to shareholders. They would no longer be able to say: “If the CEO doesn’t perform, he/she won’t get paid”. Not only is this a low trust way to start a relationship, but “they don’t get paid” often doesn’t happen.
The above would, together, hugely improve corporate and investor reputation. So what are the push backs?
Performance, remuneration and corporate governance specialists would need to do a very different job. Their skills are definitely needed but should be re-oriented to fully supporting long-horizon corporate success (which includes meeting key short-term objectives) by actively monitoring issues such as return on capital over 5 year, innovation and future value. Endlessly fiddling with share price focused pay formulae simply hasn’t worked!
Of course, “bad” CEOs may on occasion get more than they deserve. But this happens today: global investors have probably paid $15 bn in underserved performance pay to CEOs just in the USA Shareholders need to accept recruitment mistakes will happen, but repeated mistakes would be a cause for resignations from the nomination committee that finalises senior appointments and for these directors to known for having poor judgement. This would quickly improve performance.
Others say a great idea but how on earth can we get from the dysfunctional system that we have today to this elegantly clean system? Why, for example, should CEOs agree whilst the City – investment bankers, fund managers – have the potential to earn (much) more for seemingly doing (much) less? There are more fund managers at Blackrock earning over £10m p.a. than there are FTSE CEO’s! CEOs would simply move to escape this restriction! Wouldn’t CEOs just move country?
The likelihood of all these CEOs getting jobs in the USA is very slim and there are plenty of better suited candidates from outside the UK to take their place. As with any deep culture change – eg voting rights for women, abolition of slavery – the solution won’t come from technocrats and insiders. Nor can there be a complete solution one country at a time but any country can trigger change for the good, or for the bad as we now see in the USA. Fundamentally, this proposal depends on non-insiders making it happen. Might citizens, #OccpuyWallStreet and the Tea Party, put aside their differences and agree on this one issue? Or could political leaders eg Theresa May see the electoral value of not just talking but also acting decisively?
If this Godfrey’s proposal triggers investors to, finally, get their act together and make their technocratic approach do what they have been talking about for so long, that’s great. But I won’t be holding my breath and that’s why I am backing this innovative proposal. Moderates and progressives can also tear up rule books!
A shorter version of this article originally appeared in IPE, April 2017.