Good on Lord Wolfson for sharing out his bonus with his employees at Next. But with Next's share price up nearly double over the vesting period, it's interesting that such a successful CEO should feel it necessary to make such a gesture. His decision says much about the pressure executives are facing with regards to pay, particularly in the current economic climate. But there's a danger it focuses debate on the wrong issues.
Given Lord Wolfson and his team have created significant shareholder value over the performance period, his generous bonus has been well earned. It's a principle that every CEO should be defending. The real problem with executive pay is not high rewards for stellar performance: it's the fact that CEOs of firms with much more pedestrian performance are also taking away similarly large bonuses. So let's hope this latest grand gesture doesn't simply create a clamor for other CEOs to give back their bonus as such actions would amount to nothing more than using a sticking plaster when the patient needs surgery.
Where paying back a bonus or capping total pay might be more useful is as part of a healthy system of self-regulation and appropriately structured bonus arrangements. The alternatives to taking more responsibility for curbing excesses won't be so easy to stomach - as demonstrated by the current EU debate over legislation on bonus caps in financial services. This kind of cap only works if there is global agreement on pay structures - something which is very unlikely ever to happen.
The most likely outcome of such legislation would be for financial organisations to move to unregulated markets, reducing the competitive advantage of Europe - and of London in particular. The move also wouldn't achieve the main goal of reducing the EU's risk exposure to banks, because there will still be the risk of banks failing in markets where compensation wasn't regulated, leading to a real risk of contagion (remember, Bear Sterns and Lehman’s were not European banks but their failure nevertheless had profound effects here).
What's needed in financial services and for executives more generally is greater emphasis on establishing procedures for curbing (or even clawing back) inappropriate rewards for mediocre and weak performance, supported with a 'comply or explain' reporting model: identify what appropriate rewards for a given level of performance look like in general and then ask management to justify themselves when they deviate from the norm.
There will always need to be that level of flexibility for business to work. At the same time there needs to be more pressure on investors (particularly institutions) to make more noise, use their governance responsibilities and vote against executive pay arrangements that are obviously wrong. There is progress here, with institutions becoming increasingly vocal but the overall level of activism on pay remains low. Binding shareholder votes on pay would also help.
Maybe it's too cynical to say Lord Wolfson had an eye on good PR; it's certainly refreshing if there was a genuine realisation that some payments are unjustified at a time when the average pay increase is due to be only 1%. But in future, a flexible and realistic approach to compensation tied to an element of old-fashioned moral instincts would work pretty well.
Professor Steve Young is a tutor at Lancaster University Management School, www.lums.lancs.ac.uk