Executive pay is obscene – restructuring the economy is the only way to curb it
13 juin 2016
Paul Mason, The Guardian
The huge sums paid to bosses at Berkeley and Persimmon are the latest examples of FTSE grandee greed, and obvious cures such as pay caps aren’t enough
The soaring pay of British bosses has gone beyond a joke. Few people have heard of Tony Pidgley, the founder and chairman of the property giant Berkeley Group. But his latest pay rise puts him in the same pay bracket as Ronaldo and Adele.
In 2015, Pidgeley’s pay soared from just under £4m to £23.3m in a single year, thanks to a performance-related share option scheme. In total, 10 leaders of FTSE 100 companies were awarded a combined £100m in addition to their pay in 2015; Flemming Ørnskov, the boss of medical group Shire, saw his pay rise sixfold, from £2.5m to £15m. RBS boss Ross McEwan saw his pay double despite presiding over a loss at the state-owned bank.
At a time when “the elite” have come in for a bashing from all sides in politics, it is worth pointing out that FTSE grandees such as these are not even properly part of the elite. If you have to do something as useful as actually running a company, as opposed to simply managing financial investments, a Russian crime empire or feudally acquired land, you are still – in elite terms – seen as a second-rater.
Among the true elite, if you are going to run a company that actually does stuff, the optimal way of doing so is through the private equity model, where the business is managed by a close relative in a tax haven. The private equity model ensures minimum scrutiny of your accounts and maximum attendance by sycophantic journalists at your lavish birthday parties. But whatever the corporate structure, the mindboggling sums being sucked out of UK businesses by the rich are dysfunctional – both to the economy and to democracy.
Pidgley’s story is one of rags to riches. An orphan brought up in the East End of London, he predicted the top of two housing bubbles correctly and got out in time. And, as his share option scheme testifies, he correctly recognised the bottom of the 2009 property slump.
In 2009, Berkeley Group awarded Pidgley a “long-term incentive plan”, whereby he would have the option to buy thousands of shares at £4.95 as long as the share price went up. By the time he was allowed to sell the shares, their price had risen fivefold, giving Pidgley a £19m bonus. The deal was hammered as “not rigorous enough” and “excessive” by Pirc, a firm that advises investors: Pidgley and his team were aready getting ordinary salaries in the top 10% of their sector.
The three-person committee that designed the deal included a director from estate agent firm Savills and another from property firm Capital & Regional, plus the man who ran the privatised rail firm Railtrack. As for the investors who rubber-stamped this spectacular transfer of money from themselves to the company’s founder, it was the usual suspects: big investment funds run by investment banks.
Berkeley Group quintupled its share price by riding a property boom that was stimulated first by quantitative easing and then, when that didn’t work, by the government’s help to buy scheme. Because the explicit aim of QE was to push investors’ money into the stock market, boosting demand for shares, government policy helped Berkeley Group some more. Still more help was given by the UK public sector, in the form of land sales to developers on terms that generally reward the developer.
It is the same story, more or less, at Persimmon, where a share option scheme issued at the trough of the downturn looks likely to hand managers up to £600m.
The beauty of all this is that nobody did anything wrong. The non-execs who approved these deals were paid handsomely, and the investment firms could point to a share price rise. When Pidgley signed a letter from business leaders supporting the Conservatives in the 2015 election, and claiming Labour would “deter investment” – again, there was nothing wrong with that.
What is wrong is the entire system. It is geared towards transferring wealth from the people who create it – that is, people who actually erect the steel girders and install the plate glass and save their money in pension funds – towards the people who already have it. It is geared to ensuring the interests of the property-developers are represented politically and not those of, say, people priced out of the London property markets by Berkeley Group’s infamous St George Wharf Tower, where hardly anyone actually lives.
So what is the answer? A pay cap, with senior pay limited to, say, 20 times average pay? With a firm such as Berkeley, that would barely matter. It does not directly employ the people who build its buildings.
You will hear calls for more “shareholder activism” – for pension and investment firms to stop behaving like dimwits and start demanding more of their own money long-term. But these are easily outweighed by the real gains investors make from firms such as Berkeley. Its profits today are four times what they were in 2009. And next year, Pidgley will get an even bigger payday when he returns £1.7bn to the shareholders.
So, if you want to prevent wealth flowing from productive people to the elite, you have to restructure the economy. You have to stop believing £24m annual paydays are the result of an accident. You have to make property speculation a crime and pursue policies that can suppress boom and bust, whether it is in the property market, the stock market or any other market.
And you have to tax assets, not just income. Executive pay is structured around share options, not just salaries and bonuses, because it is more “tax efficient”. A tax on shares held; a tax on the value of property designed to stop it rising faster than GDP – these are the measures that would actually work. Plus, make a positive case for rent controls.
If Jeremy Corbyn’s Labour can become the first advanced-country government to suppress the causes of obscene executive pay, it will reap a massive first-mover advantage. The property market will stabilise; housing will become affordable as billionaires – foreign and domestic – take their money elsewhere. The stock market then will move in line with the real economy, not the fantasy economy created by a shortage of housing and a glut of money.
Finally, the overpaid elite will drag their sorrows through the world to another jurisdiction. Personally, I cannot wait to see them go.
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