Mighty companies are marvellous money-machines. They may flounder at innovation, fail ingloriously at strategising, serve customers abysmally, throw away market shares like confetti - but at making money, they are truly magnificent. Making it for their top executives, that is.
The 'remuneration committees' which preside over this brilliance are fine at funnelling cash and cash equivalents into capacious pockets. Unfortunately, their members are hopeless at achieving their true purpose - which isn't (as you might well think) to enrich business friends, but to encourage superior performance.
The over-riding exercise, in theory, is to ensure that chief executives (and their prime cohorts) strive with might and main to manage superbly: and to see that these stalwarts are rewarded fairly and fully for their grand achievements. In practice, neither aim is achieved. Performance is often lamentable, yet the perpetrators are rarely penalised, often copiously rewarded.
By all means, pay handsomely for jobs handsomely done. But why pay fortunes for jobs not even started? Or lavish loot upon defeated, departed bosses? The incoming Luc Vandevelde got £2 million in Marks & Spencer shares as 'golden hello', plus stock options valued at over £10 million. He gets paid £650,000 a year, too: but at least he must turn up (one hopes) to earn this bread.
With M&S mired in deepening woes (including the indefensible French closure fiasco), Vandevelde is bidding fair to join the ranks of the defeated. If he should depart, no doubt other juicy provisions lie in wait - as they do for BT's Sir Peter Bonfield. His potential leaving package apparently includes some £3 million in shares, plus a bonus (this year's or the last, whichever is higher) of another half-million.
Sad to say, a BT spokesmen was absolutely correct in telling The Times that Bonfield's bonanza is 'absolutely nothing unique', 'absolutely standard practice for any UK plc' (the fatter catteries, presumably), and the BT norm : 'There are similar agreements in all the other executive board members' contracts'. The prevalence of these arrangements, however, in any way justifies them or their continuation.
To be fair to enrichment committees (a much better name), countless difficulties surround their task. Sure, pay should be linked exclusively to performance. But that tells you neither how nor how much. The popular means (popular with recipients, that is) are salary, bonus, free shares and stock options. All have grave defects, as do all mechanisms for linking them to upside performance.
Note the 'upside'. If performance, however measured, sucks, bonus payments or salary increases or presents of shares should be off the menu. That's surely axiomatic. Some argue that you shouldn't penalise CEOs for disasters outside their control, like collapsed mobile phone sales. But these weasel words are easily countered. Then, why reward CEOs for wonders outside their control, like the previous mobile boom?
A certain rough and ready justice applies. If your beloved company does badly, so should the boss. If it flourishes, vice versa. But the next stage - reaching a sensible relationship between corporate flourishing and personal pelf - is not readily reckoned. Salary, for a start, is tied to position rather than performance. That's why, in general, the fatter the company, the fatter the boardroom pay, because top-level salaries must leave room for umpteen bureaucratic layers beneath.
This is also a competitive sport. The eager players are encouraged by equally avid head-hunters and consultants who by their comparisons set the rates for the job - and push them upwards. Once pushed, salaries are hard to cut, and easy to raise. As for bonuses, they are mostly paid, not for genuinely exceptional performance, but for 'being there'. Companies are effectively paying twice for the same contribution, which is a mug's game.
There are plenty of mugs, though. Just why did the directors of Royal Bank of Scotland deserve bonuses for their supposedly arduous labour in the National Westminster merger? The labours were surely all in a day's work, and the outcome must still be uncertain. If, like half of all mergers, this one flops, will the unrepentant chairman, Sir George Matheson, and his friends refund the payments? Flying pigs will be seen first.
The case for free shares and stock options, the deepest trough by far, has two strands. First, they link performance to the fortunes of the shareholders. Second, creators should share in the wealth they create. The wondrous Warren Buffett has memorably savaged this seductive claptrap. 'Once granted, the option is blind to individual performance...A managerial Rip van Winkle, ready to doze for 10 years, could not wish for a better "incentive" system'.
There's no connection whatsoever between a manager or management's performance and the level of stock prices. The market value of the 50 largest US companies rose by 377% between the springs of 1991 and 2001. No other indicator rose by anything near this inflation - not sales, nor earnings, nor return on capital. Not that these measurables matter: as Business Week reports, 'the growing gap between [US] pay and performance is partly the result of companies using new measures to gauge performance".
The new measures, in other words, boost pay even more gorgeously than the old - like the mysterious strategic targets whose achievement entitled Vandevelde to £810,000 more from M&S. And nothing will stop the gravy train rolling on, with British boards following happily along the golden US road. The only force that could block this progress are the financial institutions, who are the real shareholders. But people who live in glasshouses....
As graphic illustration, one Sandy Weill at financial giant Citigroup cashed $734 million in options over five years. He has 12 million option shares left (worth another $600 million) - and, for bad measure, earned $28 million in salary, bonus and restricted stock last year. His economic contribution? Zilch. To put those sums in disproportion, Weill's package is roughly equivalent to the total worth of diesel manufacturer Cummins Engine.
The worst scandal, though, is that this gross scandal of executive over-pay never gets better: only worse.
