Call to scrap cash bonuses to curb greed in the City
CASH bonuses for executives should be scrapped to help end the culture of short-term profit in the City, according to a Government-backed review.
The report also questions whether the directors of large companies should be paid any bonuses at all.
Professor John Kay, from the London School of Economics, said: ‘ Many people doing responsible and demanding jobs – Cabinet ministers, judges, surgeons, research scientists – do not receive bonuses, and would be insulted by the suggestion that the prospects of bonuses would encourage them to perform their duties more conscientiously.’
But he stops short of demanding an end to boardroom bonuses altogether.
Instead, the review recommends all bonuses should be paid in shares that can be cashed in only once an executive has retired.
The Kay report is a key plank of attempts by Business Secretary Vince Cable to overhaul the financial sector. Mr Cable has already unveiled reforms aimed at giving investors more say on excessive rewards.
The report found ‘short-termism’ is strangling growth in the UK economy by starving it of investment as executives seek to bump up their bonuses with quick profits, through risky takeovers or cost-cutting, regardless of the long-term consequences.
Executive bonuses were unusual in the UK until the 1980s, Professor Kay said, when incentive schemes started to become increasingly common.
Most bonus schemes encourage chief executives to make decisions that will boost profit in the short-run, even if they have negative effects in the longer term, he added.
The failed banks RBS and HBoS were ‘characterised by acute short-termism’ in the run-up to their collapse and bailout by taxpayers, Professor Kay said.
Public outrage over multimillion pound banker bonuses soared after a series of scandals scarred the finance sector, including the systems failure at RBS, money-laundering at HSBC and the Libor rate-rigging debacle.
Former Barclays boss Bob Diamond, who quit over the Libor scandal, was forced to waive his £20million golden goodbye.
However he is still walking
‘A very generous level of pay’
away with around £2million, on top of a total of around £120million he pocketed from the bank since the credit crunch began in 2007.
Unprecedented pay revolts have rocked a number of companies in this year’s so-called Shareholder Spring, including insurance company Aviva, media group Trinity Mirror, and drugs firm AstraZeneca.
‘It is great John Kay has raised the question of why executives need any bonus,’ said Deborah Hargreaves, of the High Pay Centre.
‘They already receive a very generous level of basic pay and they should be making their maximum effort anyway, without needing a further incentive.
‘Would they really get out of bed two hours later if they did not have the prospect of a bonus?’
But Professor Kay’s proposals are likely to be met with stiff resistance in boardrooms and the Confederation of British Industry has given them a lukewarm reception.
‘Executive pay should always be linked squarely to good performance over a meaningful period of time.
‘But it is for individual companies to decide their own pay strategy,’ said Matthew Fell, director for competitive markets.
Previous attempts to rein in boardroom pay have failed to curb the tide of excess.
Mr Cable aims to respond to the review later this year.
TACKLING the problem of short-termism is one of the longestrunning debates in the City. The review published yesterday by Professor John Kay paints an alarming picture of boardrooms populated with hyperactive individuals intent on instant gratification and hungry for attention.
In this over-paid version of a toddlers’ playground, executives are greedy for quick returns and uninterested in long- term investments that will pay for our pensions and spur growth in the economy. Kay pinpoints skewed incentives – bonus schemes that reward rapid profits regardless of the long-term fallout – for the tainted culture.
Traditional City behaviour, he believes, has been in decline since the 1980s when US-style corporate bonuses took hold in the UK.
That decade was also the point when American investment banking, which he says favours deals over relationships, took hold. Kay’s proposals include the scrapping of cash bonuses, with incentives paid solely in shares that cannot be cashed until an executive retires.
Predictably, this gained a less-thanecstatic response from the CBI, and from top accountant PwC, which said it might lead to a higher turnover in chief executives leaving purely in order to cash in their chips.
Kay also wants an end to quarterly reporting of company results, believing it encourages short-sightedness in the Square Mile.
At the heart of the problem is the convoluted ‘investment chain’ that separates companies from their ultimate owners: ordinary savers and pensioners.
The investment chain is peppered with intermediaries including pension trustees, fund managers, financial advisers, investment bankers, analysts and brokers.
All are looking to make a handsome turn and none truly considers themselves responsible for losses suffered by the often bewildered savers at the end of the line.
As well as a stinging attack on undeserved incentives – Kay even questions whether bosses deserve any bonuses at all – he wants to see an ‘ investors’ forum’ to help shareholders act collectively.
The forum should be consulted over major board appointments, a measure that might have brought misgivings over the promotion of Bob Diamond to the helm of Barclays to the fore earlier.
Kay proposes an overhaul of fund managers’ pay and wants them to disclose all their income from stock lending to short- sellers, and to rebate it to investors.
And all the participants in the ‘investment chain’ should be made to act to ‘fiduciary standards’.
In other words, their clients’ interests, not their own, should come first. The proposals, particularly on bonuses, are radical. But as Kay argues, the consequences of short-termism in the UK have been dire.
Business investment has fallen sharply as a percentage of GDP, not just since the financial crisis but over the past 12 years, slamming the brakes on innovation.
Worse, growing companies find it hard to gain access to the capital they need.
Short-termist forces have, in his view, felled the great British companies such as ICI and GEC that we once relied upon for prosperity.
These now defunct giants tried to solve weaknesses in their core operations by ‘trading in businesses’ rather than improving their performance in chemicals or electrical goods.
Former stalwart Marks & Spencer has been toppled from glory because it sought to boost its profit margins at the expense of its historically British supplier base.
BP, once the dividend-payer par excellence of the FTSE, succumbed to the temptation to skimp on safety and environmental protection, with the disastrous outcome of the Deepwater oil spill.
It is hard to argue with the thrust of Kay’s analysis. The report, broadly, was welcomed, including by Joanne Segars, chief executive of the National Association of Pension Funds, who said: ‘This report offers some useful, practical ways forward.
‘Equity markets must work more effectively in the long-term interests of investors and savers, who need to be able to see that they are getting value for money.’
Vince Cable, whose department commissioned the review, was aiming to give a response from the Government later this year. But whether the professor’s recommendations will be implemented is a different matter.
Martin Gilbert, chief executive of Aberdeen Asset Management, said: ‘I think it was a pretty sensible report and indeed we already do a lot of the things suggested.
‘Getting rid of bonuses, though, would mean less flexibility over pay and we might have to lay more people off in a downturn.’
‘None of us wants to do quarterly reporting, but it is a function of US markets. I’m not sure how anyone is going to tell US investors, who we all want on our registers, that they can’t have quarterly figures.’
As Gilbert implies, the row over short-termism is likely to rage a good while longer.