What exactly are the root causes of our exorbitant bonus culture? Why is it that the ratio of average pay to executive pay at Lloyds bank is now 1:75 compared to 1:13 a few years ago? And why is it that the take-home pay of FTSE 100 company directors increased by 49% over the past financial year? Amid the furore caused by the proposed £1m bonus share pay-out to the RBS Chief Executive, and the most recent backlash against the removal of Fred Goodwin’s knighthood, it seems to have become increasingly difficult to cut our way through the rhetoric and pinpoint the reality of why wages and bonuses have risen by so much and in such a short space of time.
Beyond arguing that all bankers are greedy and that everyone in the City is self-interested, none of us appear able to offer a coherent and credible explanation for why such figures exist. Every day we are bombarded with familiar shocking statistics, but seldom do we enjoy the same level of commentary about what led to the current boom in corporate pay-outs in the first place. Even Simon Jenkins, someone well-versed in offering a sharp and lucid analysis of current affairs – see his recent take on housing policy as a case in point – is unable to offer a valid explanation. As if talking to a brick wall, Jenkins idly notes, “The bonus culture is beyond the power of any one person or bank to end.”
Despite the apparent dearth of analysis on the issue of banker’s bonuses, there are perhaps hidden away at least two decent explanations for our current predicament. The first, and one put forward in a recent issue of The Economist, is that executives and CEOs are being generously rewarded because, in short, they suffer from ever increasing job insecurity. The second, and one which relates to a recent lecture at the RSA on the ‘optimism bias’, is that the bonus culture is boosted by our own collective aspirations (and false belief) that one day we too will be part of those lucky few at the top of the corporate food chain.
On the first point, The Economist notes that the CEOs of publicly listed companies have become Gulliver-like figures, paralysed and bound down ever more tightly with “tiny ligatures” laid by their employees, board members and shareholders alike. It has been found, for instance, that company CEOs are being ousted from their roles at a much quicker pace than ever before. According to The Economist's article, the average job tenure among the world’s 2500 biggest public companies is now 6.6 years, down from 8.1 years in 2000.
Part of this may come down to the changing nature of these Lilliputians. The Economist notes how the composition of ‘shareholders’ has altered dramatically over the years to the point where institutions such as hedge funds now control more shares than individual investors. The result, as I touched upon in a previous blog, is that companies are paralysed by combative and powerful shareholders who disrupt boardrooms and enforce the removal of board members, including CEOs, who fail to do their bidding. In compensation for their rising job insecurity, the pay and bonuses of CEOs have grown accordingly. Here, our companies are hit by a double whammy: they suffer from both an incoherent and transient leadership, as well as a burgeoning wage and bonus bill needed to compensate for that insecurity.
Regarding the second point, the rising pay and bonuses of our corporate leaders could be seen to be legitimised, if not driven, by our wildly optimistic, yet misguided, aspirations. By this I mean that we fail to take action to address the predicament of rising wages and bonuses for the simple reason that many of us believe that one day we could be in a similar position. Ask anybody whether they believe that they will come to earn a bonus of £1.4m in their lifetime and I doubt that few would say yes. But ask the same person whether they believe they could be Chief Executive of an organisation in their current field and you will probably get a far more positive response. People may dislike it and find it unfair when individual bankers do well in a crisis – that is, of course, natural – but they are still likely to want to live in a system where it is possible to do well themselves. At least one day.
Indeed, this may be one of the reasons why a surprising number of shareholders actually vote against blocking remuneration packages. According to Pensions & Investment Research Consultants (Pirc), since 2003 these packages have been voted down in only a few cases. With the Government’s recent decision to make these votes legally binding, it is likely that the number of rejections to remuneration reports will actually fall to an even lower level. Shareholders may want to flex their muscles in faux votes, but the real deal would be a completely different story altogether.
The reason why all of this important is because it ultimately dictates whether our policy responses to the current predicament are likely to have a noteworthy impact. If shareholders are run by hedge funds who are more interested in shaking up the boardroom to their own advantage than in tinkering with the amount they pay out in bonuses, increasing shareholder voting rights isn't likely to have a significant impact. And if the wider population have booming aspirations which fuel our booming bonus culture, then publishing the records of bankers’ bonuses (as asked by Ed Miliband yesterday) isn’t going to make a jot of difference. Rather, it would probably exacerbate the problem.