Arguments about executive pay come in two flavours. Economic liberals wary of government intervention reckon that, in spite of some unforgivable transgressions, the system broadly works. Activists seeking a general overhaul of corporate governance have hitched their campaign to pay and tend to say that violations are rife. On the whole, the public agrees with the activists.
This report has, with reservations, sided with the liberals. Most — but not all — of the money that companies have spent on executive pay has represented the price of attracting and motivating the best managers. This has often been obscured by the politics of pay, and by some sensational abuses. Pay has risen largely because of shifts in the market for executive talent, which are part of a more general transfer of rewards to high achievers in many professions.
The strategic decision in America to motivate managers as capitalists, using equity-based long-term incentives, was right in principle and has been widely copied across the world. Too many options were granted during the bull market, mainly thanks to an excess of euphoria and, in America, a misconceived accounting policy that has since been put right. Investors constantly face the risk that boards will make a bad job of looking after their money and fail to stand up to powerful chief executives, and sometimes boards succumb, but this is less of a danger than it was. Over the past 15 years, the managers attracted and kept in place by fat pay packets have led companies through a roller-coaster ride that has been enormously profitable for their investors.
So much for the analysis. When it comes to prescriptions, however, the activists have the stronger case. Where misgovernance has distorted pay, it should be put right. Even though the over-issuance of options was not an abuse perpetrated by the executives themselves, it was a costly mistake all the same. Boards ought to have realised what they were giving away. In addition, better governance is one way to minimise the egregious examples of excessive pay that attract wide attention and spread the belief that all companies pay their top executives too much. If that helps to restore the poor image of business leaders, so much the better.
Reform could also help to fill a vacuum at the heart of the company, especially in America. The big question in the debate about pay remains today what it was when KKR launched its raid on RJR Nabisco all those years ago. How do you get owners to act as stewards so that boards and managers will act in the best interest of owners? A former editor of The Economist defined the problem in a special report 17 years ago:
To shareholders in a typical company in America or Britain — call it Anglo-Saxon Inc — a share is now little more than a betting slip. It is bought at what a shareholder thinks are good odds, to provide winnings that he hopes will be large. The notion that he owns part of Anglo-Saxon Inc makes as much sense to him as it would for the average gambler to imagine that he owns part of Lucky Lady running in the 2.30 tomorrow afternoon. A title deed to a house tells an American or Briton what he knows instinctively: that he owns the place, and must care for it. A share certificate tells him nothing more than that he has the right to a dividend and the chance to make some cash.