Considering their own hefty rewards, it is unlikely to be the fund managers that derail the runaway pay express.
Crispin Odey is 36 years old. Last year, he received a salary of £19.5 million. Odey does not work for British Gas or a privatised water or electricity company. He is a fund manager, holding shares in those companies.
Not surprisingly, Odey can see little wrong with executives earning huge sums, at a level way beyond the rest of society. 'The money gives me a degree of freedom. It allows me to go out to buy something if I want it. But I don't spend. I think I've always spent about £50,000 a year and frankly, I think that's a lot of money. And I don't have a lot of holidays.' When Britain's highest paid man is a 36-year-old fund manager who talks so insouciantly about his spending money - albeit with a half-hearted admission that it is 'a lot' - it cannot be surprising that company directors think nothing of paying themselves a fraction of what he earns - still a hefty sum by most standards but a fraction of what their shareholders receive.
Admittedly, Odey is an exception. He heads his own business, Odey Asset Management, and has about £200 million under his control. To be fair to him, last year's salary did contain his 1993 profit share - the previous year he received a paltry £2.8 million.
But while Odey's earning power puts him well ahead of his fund management contemporaries, he exemplifies what is wrong with the at times tedious debate that has been gripping Britain these past 12 months.
Hardly a week goes by without Gordon Brown, the Labour shadow chancellor, churning out yet another set of utility pay figures or more lurid accounts of share option schemes. Yet the City hardly bats an eyelid, let alone raises an eyebrow.
Dramatic moves to unseat Cedric Brown, the chief executive at British Gas or his chairman Richard Giordano, over their 'over the top' salaries - £475,000 in the case of Brown for managing an enormous, sprawling international concern, employing tens of thousands the length and breadth of Britain, for being a pivotal figure in one of the country's essential industries and carrying all the baggage of responsibility and pressure that entails - were a damp squib. British Gas's institutional shareholders closed ranks and voted the moaning minnows down.
Part of the reason for their reluctance was that Brown and Giordano are doing a satisfactory job, and fund managers do not like upsetting the apple cart. Another is that considering what they have to put up with, certainly in Brown's case, it is difficult to know what salary would justify the hassle. Thirdly, and more tellingly, by City standards, the British Gas men do not qualify as high-earners.
Labour and the other Brown, and the Greenbury committee report on executive pay - which did not focus on fund managers, their pay levels or their inactivity, and instead concentrated on the need for greater disclosure - have got it wrong. They have picked the wrong target.
Odey may be at the top of the tree but what a tree. In its last annual report, Mercury Asset Management, which apparently prides itself on extracting value from the companies in which it invests, revealed: a long-term bonus scheme for 219 employees where the eventual total payout could be £68.4 million; 14 directors could share £24.1 million under the same scheme; directors' emoluments including pension contributions in the year to 31 March, 1995 were £4.1 million; one director earned £630,000; another, when his long-term bonus was included, received £860,000.
The top earners at Schroders, the merchant bank with a significant fund management operation, fared even better. In the year to 31 December, 1994 Schroders employed 3,380 people and paid them £236.6 million, or an average of £70,000. The 14 Schroders directors, though, were a class apart: they shared £7 million; two directors broke the million-pound barrier, with the highest-paid earning £1.43 million; that same highest-paid director's pension contribution from the company was a not inconsiderable £526,000.
At Smith New Court, the stockbroker recently acquired by Merrill Lynch, seven directors were paid more than £500,000 with one going through £1 million. Well-regarded analysts skip jobs at salaries in excess of £300,000 (excluding golden hellos and bonuses), while even in smaller fund-management and broking firms partners have received seven-figure pay-outs in a good year. With figures like these, it is hard not to feel a twinge of sympathy for Cedric Brown, now billed by the tabloids as 'the most hated man in Britain'. It is also much easier to understand why, when sections of the Conservative party, the Opposition and the broadsheet are pushing for putting a cap on pay - and the tabloids are braying for blood - the people who really do have the power to curb executive excess have closed their ears.
In March this year, when the British Gas row was at its height and the House of Commons Employment Select Committee was conducting its inquiry, some of the fund management industry's finest gave evidence. Angela Eagle, one of the more doughty Labour MPs, asked Hugh Stevenson, chairman of MAM, the second largest shareholder in British Gas, whether the company was consulted about Cedric Brown's pay package in advance? 'No,' replied the £487,000-a-year plus £121,000-in-pension-contributions Stevenson.
Had MAM met British Gas to discuss the issues raised by the public reaction to Cedric Brown's new pay deal? 'We have regular meetings,' said Stevenson, but the pay issue had not been raised. Pressed by Eagle, he replied: 'We do not feel that we can get directly involved in the fixing of remuneration in companies (in) which our clients' funds are invested.' Another MP - a Tory - Harry Greenway had a go. Was Stevenson concerned about the bad press British Gas received? 'I can imagine it was of great concern to British Gas,' said a clearly unconcerned Stevenson.
Hugh Jenkins of the Prudential, the biggest shareholder in British Gas, also gave evidence.
He was asked the same questions and gave pretty much the same answers. 'Our job as large investors is to ensure that companies have the appropriate structure and the appropriate structure includes the wholly independent board nomination and remuneration committee ...' To which Eagle retorted that it was those same structures that had got everyone into this mess in the first place. 'That is to suggest that at the end of the day the result that has come out of British Gas is an inappropriate one. That is a matter of opinion,' said Jenkins.
As chief executive of Prudential Portfolio Managers, Jenkins can lay claim to be the country's most powerful shareholder. He controls £42 billion in the UK and £32 billion overseas. He has a package which even he acknowledges is 'somewhat complicated'. His 'base salary'-his words - is £270,000. On top of that, he has a 'share participation scheme' which entitles him to a 15% bonus. If he invests that 15% in the shares of the company, the Pru will match that, giving him 30%. But if the company has a good year, he will get another 15%, giving him a 45% bonus in all.
The pay levels of those at the top filter down through the rest of the industry. According to Jane Kingsley, financial sector specialist at the headhunting firm Russell Reynolds, a fund managers' pay 'depends on the organisation he works for'. Somebody with around 10 years' experience at one of the big houses, covering Japanese stocks, say, with two or three people working for them, will be earning a base salary of about £80,000. Their bonus could be two or three times that - depending on performance.
Someone doing the same job in an insurance company, with no less money under management, says Kingsley, will not receive as much: probably around £60,000-£80,000 with a 30% bonus. 'Insurance companies have a different approach to life,' says Kingsley. 'They are not pitching for business, they manage funds that come in through their own front door from their customers.
The personalities of people in insurance companies are quite different.' A 28-year-old with five years' experience on the Japanese desk of an insurance company can expect to earn a base salary of £45,000-£60,000 - 20% more than one of the major firms.
Again, the same bonus system still applies. 'Nobody expects people to perform year in year out - that would not be real,' says Kingsley. 'Everybody has a bad year every now and again.' A cynic might think fund managers show greater generosity towards themselves than to the executives of companies in which they invest. Not true says Kingsley. 'They are more tested by trustees than they once were. Everybody is competing for performance.' Nigel Dyckhoff, who devised many of the remuneration schemes, works for Spencer Stuart, the recruitment specialists. He has no problem with anybody else's pay - provided it is tied to performance. Fund managers, he says, do not want to be bothered with the issue of pay. 'They only want to be bothered if a company is not doing well.' That applies to themselves and their own firms, as much to the companies in which they hold shares. 'They don't want to be interested in this aspect of business unless they have to be,' says Dyckhoff.
This obsession with performance - even though achieving performance may not be intrinsically difficult - dominates fund managers' thinking on pay. It also spills over into their investments. They have no problem with executives at monopolistic utilities awarding themselves hefty rises, so long as the share price also rises. The fact that the price rise may have nothing to do with the executives - and may be a reflection of the sector or even the whole market advancing - does not concern fund managers. Performance is the key, everything else is irrelevant.
Trustees, too, seem smitten by the performance bug. Hermes Pensions Management Ltd, which invests £25 billion on behalf of the 750,000 members of the Post Office and British Telecom pension funds, reports to trustees from both companies.
Only once in the past two years has Hermes publicly commented on an individual's pay - at Tiphook. That record is all the more remarkable considering the two sets of trustees to whom Hermes fund manager Alastair Ross Goobey reports. Each comprise nine members: four from the Post Office or BT; four from the trade unions and a chairman. Two sets of trustees representing 750,000 people, with around half of the trustees drawn from trade unions - and still only one public complaint in two years. Remove the fact that Tiphook had paid out £4 million to former directors who had brought the company to its knees and there may not have been one public moan at all. It is this apathy, or ambivalence even, on the part of trustees that lies at the heart of the present impasse. To put it simply: provided the shares are doing well, it is not something they care about. As they do not care, it is not fair to expect their representatives, the fund managers, to do anything - and unrealistic, considering how much fund managers earn.
'They are a bit loathe to talk to you, to be honest,' said a spokesman for one of the leading fund managers, when I called asking for an interview. Executive pay, the spokesman claimed, was not an issue for him or his colleagues. 'It is not our money, it is the clients' money - therefore we are not the ones in the driving seat.' If the people who control the bulk of the shares could not care two hoots, then nothing will be done. In the end, it all comes back to them. City law firms are among the highest payers in the country. Some of their senior partners clear £1 million a year; £500,000 is common, six figures is the norm. Each year they sit down and work out what they are going to pay themselves in the coming 12 months. It can be a thorny business. A lot depends on what has gone before, what they can expect, which partners and other fee-earners are performing and what the market is charging. And within each firm - much more so these days than previously - there are differentials. Even so, it cannot be coincidence that their top earners come out receiving what the leading captains of industry and fund managers receive.
It is as if they look across the golf club bar at the rest of their peer group and decided that is what they are worth. And the whole process begins with the owners, the people who hold the shares in the companies who hire the law firms. They, after all, pay the bills. 'Fund managers deal with captains of industry who deal with merchant bankers who deal with lawyers and accountants. We get to sit at the same table,' said Chris Stoakes, marketing partner at Stephenson Harwood, the City law firm.
Donald Butcher, chairman of the UK Shareholders Association, the fast-growing body formed in 1992 to represent the views of private investors, knows where the weakness lies. 'When fund managers pronounce on executive pay, they have to look over their own shoulders at their own practices,' he said. Nobody, least of all private shareholders, says Butcher, begrudge genuine wealth creators from being paid fortunes. Alan Sugar, he says, is entitled to every penny he receives. What sticks in the craw is not the Alan Sugars but what Butcher calls 'bureaucratic capitalists' who run the privatised utilities. They can do nothing, not even turn up for work and the money will still pour in. Neither, unlike the Sugars, do they own many shares in the business they promote. 'With their high remuneration, the directors of British Gas do not seem inclined to buy shares for themselves. I find that strange in this capitalist system,' said Butcher.
A few winters ago, British Gas executives saw their pay soar because their bonuses were linked to profits which had boomed from a cold snap. 'If you sit on a board and you allow that to happen, are you surprised when your credibility is sub-zero?' asks Butcher.
The bureaucratic capitalists owe their places to the inactivity and the general desire for a comfortable life of another set of bureaucratic capitalists: the fund managers, and trustees to whom they report. At the stormy British Gas annual meeting, where some campaigners parked a pig called Cedric outside, despite all the heat and passion, only 51% of the shares were voted.
Last year, Sir Colin Southgate, head of Thorn-EMI wrote to the National Association of Pension Funds, which is exhorting more of its members to play a role in the companies they own, congratulating its efforts on achieving a 42% turnout at his annual general meeting. Normally, Thorn-EMI's meeting is voted on by only 30% of the shareholders.
Trustees usually delegate their votes to the fund managers, which means the big groups like the Pru and MAM, can be dealing in the resolutions of hundreds of companies. Meanwhile, while they sort through that logistical minefield - which nine times out of 10 does not affect the share prices in those companies - the actual proxy card can be elsewhere, with the custodian back at the trustees. Unless the trustees are keen to vote, the chances are, the card will be forgotten about and the votes will lapse. Trustees, most of whom tend to be drawn from the senior, long-serving executive ranks of the company whose pension fund they run, do not want to be disturbed. They are happy to let the fund managers get on with it. Issues like corporate governance and remuneration pale into insignificance alongside the over-riding one of keeping the fund growing. If the shares are moving up, the trustees couldn't care less about anything else.
Ross Goobey has fought to scrap long-term rolling contracts - a move forcibly taken up by Greenbury.'I have been frustrated by the reluctance of my peers to do more than say in private how much they support us in our view on long-rolling contracts,' says Ross Goobey. 'Few investment management companies lodge the proxies of their clients as a matter of course. As a result, it is an unusual AGM at which more than 50% of the votes are lodged.' The solution for Ross Goobey rests squarely with the trustees. 'The institutions are unlikely to change their view on the desirability of voting without some external prodding. First of all, I commend every pension fund trustee to insist that the proxies relating to the shares held by their scheme are lodged in every case, and that their investment manager draws up a coherent corporate governance strategy by which the use of that vote is determined.' Post-Greenbury, trustees and their fund managers have little excuse. As shareholders, they now have the ability to approve all new long-term incentive schemes, including share options, which potentially commit their funds or dilute their equity. They can also raise questions or table motions on pay or bonus schemes. In fact, they have always had the power and influence to change anything which they found unpalatable. So far, their track record has been lamentable. Without some soul-searching and a determination to act, Greenbury and all the debate leading up to it, will have changed nothing.
Top 10 Pension Fund Managers*
Company Funds under management (£m)
1 Prudential 70,800
2 Mercury Asset Management 62,904
3 Schroder Investment Management 57,585
4 BZW Investment Management 50,000
5 Fleming Investment Management 48,631
6 Invesco 41,723
7 UBS Asset Management 40,571
8 Legal & General 31,377
9 Morgan Grenfell Asset Management 30,900
10 Natwest Investment Management 30,800
*By total funds managed - 1994
Chris Blackhurst is on the staff of the Independent.