When, in the mid-1990s, the CEO of a FTSE-20 firm was told I advised on executive remuneration, he joked: 'Ah, there is not enough of it about.' David Bolchover, by contrast, argues that there is too much of it about - at least for top earners in the private sector who aren't founders of the business.
His thesis runs broadly like this. The basis for an executive pay marketplace is 'flimsy conjecture'. 'Unjustified high pay' and 'effortless wealth' exist because of the vested interests of CEOs, senior execs, pay consultants, academics, management consultants and shareholders, all of whom foster a belief in 'the talent ideology'.
CEOs, he argues, are not a scarce resource. Tell that to the nominations committees at M&S and ITV. And their performance is neither measurable nor attributable. CEOs merely 'administer well established concerns', so the reward for doing so is irrationally high.
Bolchover concedes there might be some justification for high levels of pay where revenues are sufficient, performance is measurable and substantively positive, and if the abilities required of a chief executive are rare. Sports coaches deserve high pay, he says, and are better at their jobs than CEOs. And he feels the same way about film actors. Perhaps he prefers football and the movies to business.
This book is a quick read and, like many narratives on executive pay, full of passion. And although Bolchover reflects the disquiet of many about executive pay, sometimes he loses both his footing and the reader. He sees conspiracy where there is none. Repeated references to the 'talent ideology' (one that 'a whole army of vested interests' has 'constructed and jealously guarded') make him look paranoid. He can't bring himself to accept that there's a genuine competitive market for CEOs.
He predicts social instability and also that 'massive risk-free pot(s) of gold' serve to lure potential entrepreneurs away from their calling. He focuses on the pay of captains of industry at listed companies but ignores other areas of the economy, such as law or other services firms and private equity.
Bolchover is not altogether destructive. He's keen to suggest remedies, even if these make up a mere couple of pages of his book. He thinks the answer lies in transparency and accountability, already well established in the UK and in many other economies.
He supports the idea that companies should disclose the ratio between the lowest and highest-paid workers - something that the National Association of Pension Funds suggested some years ago but which was (rightly) not adopted, on the grounds that any ratios lead to unfair and unhelpful cross-company and industry comparisons. And his wish for the annual election of remuneration committee members is foreshadowed in the Financial Reporting Council's draft of the UK corporate governance code. He also believes that the lowest bidder for any CEO vacancy should be hired. Shortlisted candidates should be asked to state the minimum they'll accept, and the lowest bidder wins. If only chief executives could be identified and priced like bags of sugar ...
Bolchover may not not believe it, but remuneration committees, while keen to recruit the best person for the job, have no wish to pay more than is necessary. They apply their best judgment in assessing how much is enough. Non-execs generally say that their task is the hardest of all the board committees. Their job, and the scrutiny under which they carry it out, becomes tougher every year.
But aspects of Bolchover's cri de coeur should not be dismissed. We may not be heading for the 'disastrous self-combustion' he predicts, but he raises serious questions. Are we paying our captains of industry too much? Is it helpful that a focus on the income of top earners is aimed at executives of listed companies, rather than more broadly? Has the quest for performance-related pay led to so much complexity that boards have lost sight of how much they're spending on total realised pay? Should the appropriateness of executive pay be tested by means other than by reference to what other firms do?
There are more serious threats to the stability of the global economy than the level of CEOs' pay. Though flawed, Bolchover's critique is a useful reminder for remuneration committees to start asking: how much is too much?
- Katharine Turner leads Towers Watson's executive compensation practice in the UK.
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