Don’t confuse pay and performance with value. Shareholders as owners need to know the difference and then hire managers for what the company needs and should pay going forward.
The CEO and one of the entrepreneurial founders of WPP, the UK based global advertising agency Sir Martin Sorrell robustly defended his remuneration in the FT with “Mea Culpa- I am an owner and act like one” *
Bankers’ bonus and performance related issues have migrated from banking into other parts of the economy. Large corporate shareholders and their representative organisations such as the UK’s ABI and the NAPF also the US owned ISS have been voicing their disquiet at some recent AGMs over the issue of pay and performance with big names like Bill Gammell of Cairn Energy, Mick Davis of Xstrata along with Sir Martin also facing questions from their shareholders on their remuneration packages in recent weeks.
This is missing the point about what type of reform and what type of employee needs reformed. Sorrel and Gammell are founders and this makes a huge difference. With them it’s about succession and knowing when it’s time to stand aside. Strong non-executive directors who aren’t enthralled or loyalty bound to the founders should ensure this happens in large successful PLCs like Cairn or WPP. The ability to advise their founder CEOs how to respond to shareholder or employee concerns in more economically straightened times should be part of a decent non-executive’s brief. The choice of non-executives should also be discussed with large shareholder’s before their appointment to achieve this end. However founder’s loyalty and commitment to the company doesn’t need to be questioned unlike professional mangers hired to run large companies for fixed contract periods. Transformational CEOs, like miner Xstrata’s Davis, who build something quickly from small or disparate entities deserve a decent reward for their efforts too. The question with empire builders, similar to founders, is when is the expansion phase complete? What is required next for the company and how to reward the CEO depending on whether he stays or not? In this case it should be a different package for different results.
The new culture required for banking along with expunging the “too big to fail” and “socially useless” products criticisms. These do require a new regulatory system to enforce the changes in long term habits and attitudes to remove the notion of guaranteed bonuses which encouraged bad habits to form. The cultural and regulatory changes are most important in financial services covering banking, insurance and pensions. Remuneration packages for senior management shouldn’t be directly related to share buy-backs and earnings per share enhancement. This is where the effort of large shareholders should be concentrated. They should discuss, vote, and monitor the performance along with the non-executives on the motivations and culture of enrichment at various institutions doesn’t again become reckless and self-rewarding and against the interests of the population and economy at large.
Economically we need more entrepreneurs to build large successful companies. Investors at all stages of a company’s development need to keep a rein on the ambitious founder. It can be tricky but not impossible. However, investors need to realise the different nature and motivations in regards to these individuals.
LDC
*Martin Sorrell comment in FT edition 6th June 2012, p11 or search www.ft.com