Luke Johnson: Top earners deserve it

The serial entrepreneur says the High Pay Commission is no more than a front for envious lefties.

by Luke Johnson
Last Updated: 06 Nov 2012

I attended a lunch recently where the guest of honour was Deborah Hargreaves, chair of the High Pay Commission. This highly political construct adopted a deliberately misleading name to give it bogus authority. In fact, it is not official in any sense, unlike every other commission I can find. It was established by a left-wing think-tank and none of the 'commissioners' were from the private sector - they came from places like the Guardian, the TUC and local authorities. Yet they claimed to be an 'independent enquiry' and 'non-partisan'.

Their conclusions were so predictable I could have written them myself and saved a lot of effort. 'Executives at the top are paid too much; it is most unfair and bad for society'. Real capitalists in places like Hong Kong must laugh when they hear how British culture is so obsessively envious. No wonder investment, talent and growth flow to Asia, while we struggle to create wealth and jobs.

While I agree with some of the suggested remedies around transparency of pay and reform of remuneration committees, to me the 'commission' lacks all credibility because its instinctive anti-business, left-wing bias shows through in every aspect of the report. Its expert panel was dominated by predictable lefties like Polly Toynbee (the good old Guardian again) and one of the authors of the deeply flawed progressive bible The Spirit Level.

The entire debate over boardroom rewards in major companies has been distorted by the big banks. Pay in the City is frequently enormous compared with what bosses can earn in almost any other industry. Demonising all business because of investment banks' behaviour will hurt the economy and reduce living standards, not improve them.

Essentially, the attacks on pay focus on public companies. That is because they are soft targets, since salary information for directors is easily available in the annual report. But many executives know the biggest rewards are now outside the plc world and lie in places like private equity-backed companies or hedge funds. If the objective of pressure groups such as the High Pay Commission is to drive more talent away from publicly owned corporations, then they're doing a good job.

Private equity succeeds because the interests of management and owners are aligned. Yet this 'commission' proposes scrapping almost all performance-related rewards. Overall, I'm in favour of commonsense ratios of pay between bosses and workers, and in my businesses the figure is never more than 20:1. But God forbid I should inculcate such policies in my investments because the sanctimonious mob at the High Pay Commission recommends it.

For the past few years I have hosted a panel session of entrepreneurs at the Retail Week Conference. It is always an enjoyable hour. Founders are by nature non-conformists who tend to say what they think, rather than mouth platitudes because of company policy.

Easily the best responses came to the question 'What was your worst moment in business?'. Jonathan Elvidge of RED5 Retail had been through a nightmare of near bankruptcy at his previous business, with landlords hounding him over personal guarantees on 25-year leases. But he rebuilt a revamped gadget offering and is once more expanding. And Tom Allason, founder of Shutl, told the story of how his early entrepreneurial exploits at university in the US led to him featuring on the FBI's most-wanted list. Since then he has launched two successful start-ups.

As ever, the stories from my fellow panellists reminded me that entrepreneurial careers are both unpredictable and fascinating.

Even if they do not become rich, business owners tend to have lives that are varied and dramatic - surely the vital elements of a purposeful existence.

For 30 years, I have believed that the emotional rewards for doing your own thing comfortably outweigh the benefits of working for others - even if material advantages are never achieved. In essence, an entrepreneur is the 'residual claimant', responsible for what is left over in a venture when the various liabilities and assets are settled. In the past, as Philip Auerswald writes in his new book The Coming Prosperity, 'risk takers undertook perilous voyages in the name of God, glory and gold. Today, entrepreneurs seek meaning, reputation and profit.' Entrepreneurs are where the buck stops.

I recently spent an hour or two viewing a business I'm considering buying, where the vendor did everything she could to put me off. Initially, I found her attitude perplexing, but it soon became apparent that she was a forced seller and felt bitter towards anyone who might exploit her distressed situation. I left the meeting sensing the asset might represent a bargain - but also feeling alienated, wondering whether I would even attend the short-notice auction.

In general, I've found that personal difficulties of one type or another are the trigger for many business disposals. Death, divorce, illness, partnership disputes - these are the main reasons why family owners sell sound companies in a hurry. In such circumstances, I tend to feel conflicting sentiments: the expectation of a cheap deal; but also reluctance to take advantage of those suffering misfortunes. Unfortunately, business, like life, frequently seems unfair. Entrepreneurs who strive for equality and ethical perfection against their best economic interests are likely to fail in their quest.

I think I may just put in a low-ball bid.

- Luke Johnson is chairman of Risk Capital Partners

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