Shareholders voting against executive pay: the marvel is not that the directors had their bonuses questioned, but that they had bonuses at all

"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