Bosses to wait longer for bumper payday

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For as long as I have been taking an (eccentric?) interest in these things (oh gawd, almost 30 years), there has been a neurotic, agonised and impossible-to-resolve debate about how best to align the interests of a public company's owners and its senior executives.

Let's ignore (as always) the ginormous elephant in this well-appointed room, to wit that those acting on behalf of the owners aren't really the owners but their agents (fund managers appointed by trustees representing savers), and simply point to an interesting trend highlighted in the Financial Times - namely that for so-called long-term incentive schemes, there is (probably irresistible) pressure for bosses to wait far longer to get their mitts on shares they've supposedly earned.

The FT says one of the world's biggest and most influential investors, Fidelity Worldwide, has written to 400 big companies in which it has stakes, warning that it wants them to increase from three to five years the length of time that must pass before shares from an incentive scheme vest.

To translate.

When Sir Richard Rich, of Rich Pickings Plc, is awarded an incentive scheme stipulating he will be given many millions of pounds of shares so long as Rich Pickings hits certain fashionable targets - normally some measure of how the company performs for the owners relative to its peer group - hitherto he would not be able to pocket any of those shares for three years after the date of award.

What Fidelity is saying is that Sir Richard, and the bosses of all other substantial listed businesses, should henceforth have to wait five years for the big pay day.

If these incentive schemes aren't elongated, Fidelity will be minded to vote against any company's pay policies at the annual meeting.

So can we expect fireworks and strife in the current round of negotiations on bosses' pay on this issue?

Apparently not.

I've spoken to the chairmen of a few of our biggest companies this morning, and they say that five years will in the coming months be the new norm for the length of these schemes.

Or to put this in simpler terms, the balance between shorter term incentives (what we typically call bonuses) and longer term ones is being shifted towards the longer term.

In other words, Fidelity is pushing at an open door.

So good thing or bad?

Well, as is my wont, I will state the spectacularly obvious: we all had a pretty harsh lesson in recent years about what can happen if chief executives have big incentives to push up profits in a reckless and unsustainable manner to earn cash bonuses (a big hello to all our banks).

So if managers believe that the big money is to be earned by running a business in a prudent way over the longer term, owners and the economy should feel the benefit.

Hip hip.

Or at least that is the theory.

But whether we do ultimately reap a societal benefit from forcing executives to wait for their wealth will all come down to the execution.

And the issue here is the nature and complexity of the targets to be hit, for the shares to be handed over.

Right now, these incentive schemes run to many pages of formulae and clauses, such that they are almost impossible to understand - which gives little confidence that they can be monitored effectively by shareholders.

A cynic would say this is to make it easier for executives to manipulate corporate performance for personal gain - and that there is an all-too-effective industry of remuneration consultants whose raison d'etre is to help executives game the remuneration principles set by owners.

Maybe that ain't so. But would it be so terrible to have remuneration agreements that someone who isn't a grandmaster in 3D chess might be able to grasp?

Is it really impossible, with a public company, to establish, as and when Sir Richard Rich retires to his arboretum in Wiltshire and chalet in St Moritz, whether he has left Rich Pickings in better or worse shape than when he arrived.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 165.

    One watches a programme about the industrial revolution and a shot come up showing a gigantic mill, surely built in, say, the late eighteenth century in some beautiful unspoiled bit of the countryside.

    The people who began the industrial revolution (setting us on relentless upward progress) didn't seek vast riches just, say, a year later. They played the long game

    Today? Gimme, gimme, gimme

  • rate this

    Comment number 164.

    I suspect it was because the government told them to as the workers were coming home and would outnumber the bored conservatives who are waiting to attend their conference.

    I am afraid like most HYS on the BBC it degenerated into a battle of prejudices.

  • rate this

    Comment number 163.

    So BBC, Why, WHY, WHY, have you closed the thread on Ed Millbands pledge to freeze fuel prices.

    Most people had hardly got home from work, let alone had THEIR say.

  • rate this

    Comment number 162.

    Dump the target culture as it drives the wrong behaviours. It also creates a me me culture

    Reward teamwork and achievement

  • rate this

    Comment number 161.

    On the perverse effects of modern ways of paying company bosses, it's worth reading Andrew Smithers' new book, "The Road to Recovery". It blames the dearth of investment by companies on incentives to maintain high profit margins and to overstate earnings per share. So share buybacks are preferred to investment that might hit earnings in the short term.


Comments 5 of 165


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