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Sunday, 22 April 2012

Sunday, April 22, 2012 Posted by Jake 11 comments Labels: , ,
Posted by Jake on Sunday, April 22, 2012 with 11 comments | Categories: , ,

"The marvel is not that the bear dances well, but that it dances at all."
Russian proverb, on a performing bear in a circus.

Remuneration committees have continued to thrust bonuses at their well paid bosses in spite of unremarkable and failing performances. 

The usual defence is that the bosses' contracts legally bind the companies to offer the bonuses. The question left unasked is why the remuneration committees wrote the contracts in this way.

The remuneration committees say they take the advice of "compensation consultants" to ensure their pay is competitive in the market. A US Congressional Committee looked into this, and concluded that the same compensation consultants who were advising on executive compensation were:

simultaneously receiving millions of dollars from the corporate executives whose compensation they are supposed to assess.” 


The report went on to say -


  • The fees earned by compensation consultants for providing other services often far exceed those earned for advising on executive compensation. In 2006, the consultants providing both executive compensation advice and other services to Fortune 250 companies were paid almost 11 times more for providing other services than they were paid for providing executive compensation advice. On average, the companies paid these consultants over $2.3 million for other services and less than $220,000 for executive compensation advice.
  • Some compensation consultants received over $10 million in 2006 to provide other services. One Fortune 250 company paid a compensation consultant over $11 million for other services in 2006, over 70 times more than the company paid the consultant for executive compensation services. Another Fortune 250 company also paid a compensation consultant over $11 million for other services, over 50 times more than it paid the consultant for executive compensation advice.
  • Many Fortune 250 companies do not disclose their compensation consultants’ conflicts of interest. In 2006, over two-thirds of the Fortune 250 companies that hired compensation consultants with conflicts of interest did not disclose the conflicts in their SEC filings. In 30 instances, the companies informed shareholders that the compensation consultants were “independent” when in fact they were being paid to provide other services to the company.
  • There appears to be a correlation between the extent of a consultant’s conflict of interest and the level of CEO pay. In 2006, the median CEO salary of the Fortune 250 companies that hired compensation consultants with the largest conflicts of interest was 67% higher than the median CEO salary of the companies that did not use conflicted consultants. Over the period between 2002 and 2006, the Fortune 250 companies that hired compensation consultants with the largest conflicts increased CEO pay over twice as fast as the companies that did not use conflicted consultants.
Some bosses had the sense to decline the lucre with little public goading, though some wailing and gnashing of teeth was heard as certain packages were sent back. Of course, not all CEOs turn down their bonuses. The shareholders of Citigroup voted against their CEO's multimillion dollar pay package.

Vikram Pandit, the CEO in question, took control of Citigroup in 2007 since when the shareprice dived and is yet to resurface. The shareholder vote is not binding, so it will be up to Vikram whether he declines the money.

In order to avoid a similar humiliation the Barclays CEO, Bob Diamond, agreed to defer, rather than decline, half his £2.7 million bonus. Though that is a small part of his overall £17.5 million package. His deferral is not for the good reasons that the Barclays' shareprice has languished, nor because its dividends to shareholders have been paltry, nor because it is making the news for the Payment Protection Insurance rip-off and the dodgy Interest Rates Swap Agreements it sold to small businesses. It is in order to avoid the humiliation of the shareholder vote, which like Citigroup is also non-binding.


Logica bosses turned down £1m in bonuses: after a year in which the UK-based IT services company lost a third of its value and announced 1,300 redundancies


Rio Tinto Zinc's CEO turns down £1.6m bonus, awarded in spite of languishing shareprice and a US$38 billion bad investment

LloydsTSB CEO turned down a £2.4m bonus, awarded in spite of 2 months sick leave and dreadful share price performance.



RBS CEO, Hester, had a £963,000 bonus snatched from him by public opinion. A bonus awarded in spite of continuing dreadful shareprice performance.


Network Rail's CEO turned down his £340,000 bonus, awarded in spite of running the most inefficient operation in the western world.


"Be not afraid of greatness; some are born great, some achieve greatness, and others have greatness thrust upon them."
William Shakespeare

As is said of greatness, so it is with wealth and the three ways of achieving it.
  • Be born to it
  • Achieve it, by talent and hard work
  • Have it thrust upon you by a remuneration committee

11 comments:

  1. MF Global literally lost (as in misplaced http://www.bbc.co.uk/news/business-16097185) around US$1.6 billion of customer money and went bankrupt.

    Initial plans to pay bonuses to the executives winding up the company have been abandoned.
    http://www.reuters.com/article/2012/04/24/mfglobal-payout-idUSL2E8FO99Y20120424

    ReplyDelete
  2. In September 2011, the board of New International felt it necessary to shove a bonus of $6million at James Murdoch. How he must have blushed:
    "News International boss James Murdoch has declined a $6m (£3.7m) bonus, citing the "current controversy" over phone hacking at the News of the World."
    http://www.bbc.co.uk/news/business-14770818

    ReplyDelete
  3. Aviva CEO has decided not to accept a payrise that would have taken his pay to over £1m. A rise offered to him by the Aviva remuneration committee inspite of the shareprice falling by 25% in the previous 12 months.

    http://www.bbc.co.uk/news/business-17891858

    ReplyDelete
  4. Inspite of the Aviva CEO declining his latest payrise, Aviva loses vote on executive pay at its AGM in May 2012. Hardly ever happens, but as the vote is advisory it hardly matters - beyond embarrassing the unembarrassable
    http://www.bbc.co.uk/news/business-17938865

    ReplyDelete
  5. 49.9% vote against £1.2m 'retention bonus' for William Hills (the bookmakers) CEO, to persuade him to stay until 2013.

    William Hills chairman, defending the payment, said "Ralph Topping has done one hell of a job. He’s not a rotating CEO. This is a guy who has been with the company for 41 years.”

    The question - having stayed 41 years, how hard did they have to try to persuade him to stay one more year?

    http://www.guardian.co.uk/business/2012/may/08/william-hill-shareholder-revolt-pay

    ReplyDelete
  6. BBC reports: "At the annual general meeting of Cairn Energy, the board sustained a two-thirds vote against the report of the committee that sets salaries and bonuses for the most senior staff.

    That follows a plan to reward the chairman, Sir Bill Gammell, with a bonus of more than £3m."

    http://www.bbc.co.uk/news/uk-scotland-edinburgh-east-fife-18106511

    ReplyDelete
  7. Reuters reports:
    "Prudential attracts 30 percent 'no' vote on pay.

    Britain's No. 1 insurer, said investors holding 30.33 percent of its shares voted against its executive pay plans, the latest in a wave of shareholder revolts against excessive rewards that has forced two high-profile CEOs to quit.

    The dissenting vote, well ahead of the 6 percent average for British firms last year, came from small investors with concerns about specific aspects of Prudential's pay practices"

    http://uk.reuters.com/article/2012/05/17/uk-prudential-agm-idUKBRE84G0VK20120517

    ReplyDelete
  8. BBC reports:

    "WPP shareholders have voted against the company's executive pay report, which includes a £6.8m deal for chief executive Sir Martin Sorrell, by a majority of 59.5%."

    http://www.bbc.co.uk/news/business-18414152

    ReplyDelete
  9. FT reports:
    CWW executives’ pay rises after they quit, having lead the company to a fall in shareprice from 55p to a low of 14.2p
    "..all three were paid more in 2011/12 than in 2010/11, despite the underperformance versus the FTSE and the telco sector. CWW has a long history of overcompensating its executives.”

    http://www.ft.com/cms/s/0/81adf07a-ba2c-11e1-aa8d-00144feabdc0.html#axzz1yJGE7zUw

    ReplyDelete
  10. The Independent reports:
    "What recession? Top bosses' pay rockets
    Executive pay rises by 8.5% to average of £3m – as everyone else's goes down"

    http://www.independent.co.uk/news/business/news/what-recession-top-bosses-pay-rockets-8057359.html

    ReplyDelete
  11. It must be tough at the top but it is even tougher at the bottom !

    ReplyDelete

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