What does 'Fair' mean in executive pay?

This is the text of my presentation at the High Pay Centre's event at the Tory Party Conference last night.  The question was:

THE BIG PAY DEBATE – CAN THE CONSERVATIVES BE THE PARTY OF FAIR PAY?

Other speakers were Frances O'Grady, General Secretary of the TUC; Nadhim Zahawi, Conservative MP; and Anthony Browne, CEO British Bankers Association. 

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In the New Testament, Matthew 19:27, we hear The Parable of the Vineyard Workers.  Some of them worked in the vineyard all day; some worked half a day; some worked only an hour.  But each of them was paid exactly the same amount at the end of the day.  There were some pretty angry people around at that point.  Let me quote you the vineyard owner:

“'Friend, I am not being unfair to you. Didn't you agree to work for a denarius? Take your pay and go. I want give the man who was hired last the same as I gave you. Don't I have the right to do what I want with my own money? Or are you envious because I am generous?"

Thankfully, this parable is about getting into Heaven, and not about fairness in pay.  Because most of us would think that he is being unfair, and that those who worked hardest should get more.

So, fair pay obviously isn’t about equality of outcome.  But what is fair pay?

I did a PhD to try to resolve this.  I failed – not the PhD! – just in finding the answer.  There isn’t an answer.  So instead of researching ‘How should we pay the directors?’  I decided to ask ‘How do we pay the directors?  How do you decide how many zeroes come at the end of the first number?’

And I can summarise my 100,000 word PhD in fewer than 140 characters – “I want this much, because he’s got that much.”

When you look at the research on executive pay, you come across ‘fairness’ in various forms.  I can summarise it like this:

·         Pay has to be fair

·         Pay has to be seen to be fair

·         Pay has to be seen to be set fairly.

What we need to consider is fairness of Outcomes; Transparency ; and fairness of Process.

We know from research that people are prepared to accept wide differences in pay if they perceive the process of pay determination as following fair and transparent rules.  It’s what academics call Procedural justice. And it is fundamental.

I think that that is one of the reasons why we use ‘the market’ as a benchmark for executive pay packages – if the sum is determined externally’ by ‘the market’ then we can see how we came by the number, and so that is a tick in the box.  The problem is, of course, that ‘the market’is a myth.

When economists talk about a market they mean the intersection of supply and demand curves for a product which is in wide supply and where every unit is interchangeable.  They also imply complete transparency and full knowledge and no transaction costs.  None of these things apply in exec pay – individuals have different qualities and experience, and jobs require different attributes.  And ‘the market’ only covers those companies against whom we choose to benchmark.  So it’s not really a market at all. 

However, if you take benchmarks out of the equation, what do you put in their place?  I’ve been asking that question a lot recently, but there aren’t any really good answers coming back.

What we need to do – somehow – is reset that benchmark.  I’ve always been struck by a comment made to me by one of the CEOs I interviewed for my research.  He said:

If the salaries for the average FTSE chief executive were half as much, … they would still be more concerned about that relativity than they would about whether it’s half.

At the top, it’s not really the amount – it’ all relative.

Please note – I am definitely not suggesting a statutory cap on executive pay to bring it down.  I don’t think that would work.  (The Roman Emperor Diocletian  tried it at the beginning of the fourth century, in order to ‘establish justice’ among his people, and stop inflation.  It didn’t work then, either.)

But …Moving on from just benchmarks…

I think the need to be Fair also influences the desire to reward performance with pay.  Performance-related pay has been a fundamental part of the UK’s executive pay system – indeed the world’s executive pay system – for the last two decades.  We say in the UK Corporate Governance Code that a “A significant proportion of executive directors’ remuneration should be structured so as to link rewards to corporate and individual performance.”

We ask for the pay-performance link because it is seen as fair.  Going back to the parable of the vineyard – those who do the most, who contribute the most, who achieve the most – they should get more reward.  But we haven’t got it right yet.

We are all familiar with the perverse incentive that bankers had to take excessive risks, knowing that if the gamble paid off they got a huge bonus; and if it didn’t pay off we picked up the bill.  That, in part, is a function of the fact that it is really, really difficult to design performance measures and targets that will be meaningful, achievable, and not dysfunctional.

It’s also difficult to design pay that is fair to the Executives, to the Shareholders and to the other Stakeholders, because everyone has different interests.

But the other problem with performance-related pay is that we also know, from research, that pay is not a marvellous motivator.  Motivation comes in two flavours: ‘intrinsic’, that relates to one’ desire to do the job, and ‘extrinsic’, relating to the monetary reward, the pay.  There is a lot of work done that demonstrates that having a large extrinsic reward is actually detrimental to performance for people doing complex cognitive tasks.  Which is a pity; complex cognitive tasks are exactly what we want from our executives.  I’m not saying we should – or could – get rid of bonuses; I think they have their place; but it’s interesting that fairness in rewarding good performance might have negative implications.

I’m coming to the end of my time, so I’d like just to revisit the concept of ‘fair’ with a series of questions.

If an oil executive gets a multi-million £ bonus for producing great profits at a time when the oil price is very high, so anyone could make money: is that fair?

If that same oil executive doesn’t get a bonus when the oil price falls to $10 – which it has in the past – is that fair?  Even if he has managed to contain the losses so that the performance is extraordinarily good in the circumstances?  Is that fair?

If the pay of a female executive rises by, say 33% to be equal to the pay of her male counterparts: Is that fair?

If Stephen Hester, who gave up a well-paid position to come and run RBS and did a great job of it, and improved the tax-payers’ position … if Stephen Hester can’t get a bonus for doing that: is that fair?

Thank you.

Dear Hotel...

Dear Hotel

Let me make myself clear.  This post is not (totally) about the hotel in which I stayed this week. Nor is it (totally) about the hotel in which I stayed last week.  Nor the one last month.  Nor the one the month before.  Nor indeed the previous months' hotels.  But all of the matters raised in this post things have impacted on my hotel stays several times this year, in one location or another.

It is a heartfelt plea to hoteliers in general to incorporate some novel design features into their rooms. To think about how guests actually use the space, and to make some practical changes to help us.

The issues below are not set out in order of importance, nor order of annoyance, nor even alphabetical order.  I'll leave it to you to decide which to prioritise.

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If I were in your hotel for a romantic assignation, the artful placement of lamps and the overall effect of subdued lighting would be ideal. Alas, romance is not on the menu and I'm at your hotel to work. Please provide lighting that is good enough for me to read by.  And, given that I will be trying to read both at my computer and whilst lying in bed, please make sure that I don't end up squinting in the gloom. 

Moving on.  I use my mobile phone as an alarm clock.  I also need to recharge the phone overnight, ready for battle the following day. Is it beyond the wit of Man to provide a spare socket by the bedside table so that I can do both of these things at the same time?  (A double socket would be even better, then I could listen to the radio though my iPad as I drift off to sleep.)

Speaking of sleep, I like spare pillows.
And spare blankets.
Thanks to those hotels who put some in the wardrobe for me.

(I’m also grateful for the tray of teas and coffees, especially those that give me enough milk.)

And I deliberately turned off the air conditioning when I first arrived in the bedroom, so please don't keep turning it back on.  It is wasteful environmentally to leave it on all day when the room isn't occupied, and it means it's freezing when I get back.

Oh, and speaking of environmental matters, I totally, 100%, support you in your aim to reduce the washing by using my towels for more than one day.  So I would be delighted to hang my towels up as a signal to the chamberperson (ugly word, but I am an equal opportunities hotel guest) to leave them be. Two problems. Firstly, it would be helpful if there were a towel rail, or even a hook, on which to hang them.  And secondly, please inform said chamberperson that if the towels are hanging up, s/he should not replace them with fresh ones.  So often, I hang them up but they are replaced anyway; you seem to be training your guests,  but not your staff.

(Note - that last comment is in no way a gripe against the hotel staff.  I have been fortunate to stay in places where the chamberpersons, receptionists, wait-staff and others were all really good at their jobs, and rather nice to deal with.  Thank you all.)

Right, where was I?  Oh yes, the bathroom.  Let me give you a lesson in anatomy.  Men are convex, women concave.  Without wishing to be indelicate, that means that if the only way to wash the body is a fixed overhead shower, men can wash themselves.  Fully.  Trying to wash the concave bits from just a shower head fixed to the ceiling requires a physical dexterity that I didn't possess even in my youth.  So please can we have a hand-held shower as well?  Or a bath? Or, bliss, a bidet?

Oh, and memo to one particular chain of designer hotels: having the shower head fixed to the ceiling above the centre of the bath would make much more sense if your shower guard were not also fixed, running from the wall to align with the centre of the bath. The shower floods the room, and to be honest, this is your fault, not mine.

While I'm in the bathroom, please can we have a magnifying mirror.  And place it somewhere near a good source of light.  That way, I don't need to use Braille to put on my makeup.

A couple of minor quibbles while I'm on my way through this list.  Why don't you ever provide enough hangers?  If I have to be in your hotel for a week's work, I need to bring a lot of clothes.   These need hanging up; four hangers per wardrobe really doesn't cover it.  (And I don’t like those wretched hangers that are attached to the rail; they are unnecessarily cumbersome to use.  Given the amount of valuable stuff lying round in the room, why assume I’m going to nick the hangers?)  And, incidentally, when did hotels stop providing drawers?  I've stayed in two recently where there was hanging space (assuming I supplemented the hanger inventory with my own, smuggled in from home) but no drawer space.  Is it a new fashion thing, that drawers ruin the line of the furniture?  Not impressed.

Speaking of 'designer', do people really like the trendy idea of having the room functions controlled by an iPad (other tablets are available)?  In the old days, when the alarm clock went off at an unearthly hour of the morning, I could reach out of the bed, feel for the TV remote, press the top button and generally get some form of news broadcast to bring me gently into a waking state without having to move too much.  When the only way to access the TV is a tablet, I first of all have to find my glasses, then wake up sufficiently to see which way up to hold it, how to switch it on, and which touch-sensitive menus to use to get to the required station.  Look, I know tablets are cool - I've already owned up to having one - but they have their place.  And this isn't it.

Oh!  And while I'm on about tablets:
Wifi. Is. Not. An. Optional. Extra.
Charging me an exorbitant day rate for using wifi in my bedroom is like charging me extra for hot water.  Or for the bed linen.  Or chairs.  For heaven's sake, do what most US hotels do and make it free.
(And words fail me for those hotels which charge a huge sum and then provide totally useless wifi.  The number of times I've ended up sitting on a hotel corridor a few yards from my room, waving my iPad in the general direction of Reception in the hope of picking up their weak and ineffectual signal...)

On a related matter...  We have already established that I carry an iPad and a mobile phone.  How do you think I carry them around?  I ask this because your magnetic keys are so pathetically sensitive that when my hotel key resides in the same handbag as my devices - which it has to, as I have no pockets - the key de-programs itself.  You are tired of me coming to Reception to get it re-set.  I've got news for you: so am I.  But no, I'm not keeping the key snuggled up to the devices; it's in a separate compartment, but, yes, in the same bag.  That's the best I can do.  Please sort this out at your end.

And so, dear Hotel, I come to the end of my plea for better design.  Please don’t take offence.  I think that your staff are often excellent, your beds largely comfortable, and your breakfasts generally very good.  But with a little thought it could be SO much better…

Why I don’t like Cash Shells

A cash shell is a company formed to make an unspecified acquisition. It raises money by listing on a stock market, with the stated intention of making an acquisition once it has achieved that listing. The eventual acquisition is then financed using the cash raised and, often, newly-issued shares.

I’d known about cash shells for years – I got interested when the ill-fated Knutsford Group plc[1] came and went in 1999 – and I’d never understood why people would put their money into such a vague proposition. When The Today Programme asked me to speak about Bumi, I started to research it further.

The original prospectus for Bumi (or rather, Vallar plc, the name of the company before it made its acquisition) referred to incentives for the Founders, Nat Rothschild and James Campbell. Now, executive incentives is my research subject, so I got interested and followed this up. It said – once you cut through the legalese - that the Founders would get Founder Shares and Founder Securities in order to, “incentivise them to achieve the Company’s objectives. The Founder Shares reward such members of the Vallar Team for their initial capital commitment to the Company and for completing the Acquisition… The Founder Securities encourage the Vallar Team to grow the Company following the Acquisition and to maximise value for holders of Ordinary Shares by entitling the Vallar Team to a share of the upside in the Company’s value once the Performance Condition is satisfied …”


Hmm – I’m sorry, but why exactly do they need this incentive? Surely growth and value are what they are founding the company to do? And as they are putting their own money into it, isn’t the prospect of that capital growth incentive enough? Apparently not.

Now, Founder Shares are a very commonly-used device in venture capital deals, where the founder of a business puts in a lot of effort to develop an idea/product before the financiers invest. In order to compensate them for this, they receive ‘sweat equity’ in the form of Founder shares that will convert into Ordinary shares on favourable terms if the enterprise is successful. This is a very useful device in structuring the finance for a venture capital-backed business. But in this listed shell company, I’m at a loss to see how much ‘sweat’ has been put into the enterprise at this stage.

I mean, it’s not as if they are doing the work for free. As well as being directors of the company, for which they, quite properly, receive a fee, they are also its Adviser. Well, technically they are not the Adviser, the Adviser is a newly-formed Jersey-based Limited Partnership. But the Founders appear to be the main owners of that partnership. And the partnership is going to do quite nicely out of the company. The prospectus says:

“…the Adviser will receive an annual fee of £5,000,000 or 0.5 per cent. of the average Monthly Market Capitalisation of the Company for the year in question (whichever is higher), subject to a maximum of £10,000,000”

So, £5m a year. Plus, the Adviser will be reimbursed all reasonable transaction-related costs when an acquisition is being considered. They are not doing too badly so far.

Now, back to those Founder Shares and Securities. Founder Shares always imply that the founders are getting a sweet deal – as I said earlier, that is the reason for them. How sweet is this deal?

Well, it’s not too easy to understand. So let me translate it as I see it, and explain a bit about venture capital deals as we go along.

In venture capital, you aim to make your money on an eventual sale of the business. So, the aim is to grow the enterprise, and sell out for a high share price. Let’s say that a company is started with £100,000, of which the Founders put in £10,000 and external investors £90,000. What might happen is that the Founders receive 10,000 Founder shares and the other investors receive 90,000 Ordinary shares. A few years later, the company is about to be sold, for say £1m. Just before sale, the Founder shares will convert into Ordinary shares. If they converted at par, i.e. one Founder share became one Ordinary share, then there would at the point of sale be 100,000 shares in issue, and the Founders would get £100,000 of the £1m proceeds.

Still with me? Okay, let’s make it a bit more complicated. We want to give the Founders an incentive to work really, really hard, and we want to reward them for what they brought to the business before the investors came in. So instead of converting the shares at par, we’ll convert such that for every one Founder share you get two Ordinary shares. That means 110,000 shares in issue on sale, with the Founders getting £181,818 of the £1m proceeds. A conversion of 3:1 would give the Founders £250,000. And so on. The Founders get more as the conversion ratio increases; and the investors agree to this because they know that without the Founders there wouldn’t be a business.

Right, now that we’ve had a venture capital lesson, back to the Vallar prospectus. There are Founder Shares and Founder Securities, so let’s deal with each in turn.

The Founder Shares convert into Ordinaries using a formula that is slightly different to the one I demonstrated above, and rather more complex. It means that if the Founders put in £20m and another £680m was raised from external investors, the Founders’ investment of 2.85% of the whole would give them 6.67% of the company. Using the terms from above, that is a conversion ratio of about 2.4:1.

Then there’s the Founder Securities. The terms again are quite complex, but broadly, these give the Founders 15% of the increase in the value of the company over and above its value at the flotation.

Okay, let’s summarise. If you put your money into this shell company you would be buying shares in an unidentified business, in the hope that its promoters (a) found a target to buy, (b) could buy it at a not-too-excessive price, and (c) could run it successfully in order to make it worth more than it was worth to its previous owners. (They need to create some sort of synergy – a grossly-misused word in corporate finance – in order for them to justify paying the vendor a premium over what it’s currently worth. Because presumably, the vendor is not going to sell out for less than it’s currently worth…) That’s quite a big ask. And in exchange for you giving them your investment funds on trust, they will take out salary, advisory fees and a rather significant share incentive.

Please don’t think I’m getting at Messrs. Rothschild and Campbell for this. I’m not. Well, not really. I happen to have looked at Bumi because I was on the Today Programme talking about it. But what they are doing, although very aggressive, is above-board. I pulled all of this information out of the prospectus, which is a public document. Any potential investor could read it.

Do other shell companies do similar things? Well, I had a quick look at a shell company that was floated about the same time as Vallar/Bumi – Horizon Acquisition Company. This company, led by entrepreneur Hugh Osborne, raised about £400m floating as a shell early in 2010 with the aim of buying over-leveraged businesses hit by the financial crisis. On a very quick look-through, its remuneration structure is less aggressive that Vallar’s. It doesn’t have Founder Shares but it does have Founder Securities, which convert to the same 15% of capital gain as did Vallar’s. What is interesting to me about Horizon is what it did with the money. Here is an extract from the RNS Announcement [2] (I couldn’t find the prospectus online):

“Horizon intends to acquire and restructure a single major business or company, significantly reducing its debt (the "Acquisition"). The business is likely to have significant operations in the UK, to have an enterprise value of between £1 billion and £3 billion ( although a business with a larger enterprise value may be considered ) and to be constrained by its capital or ownership structure. … Horizon intends to use the net proceeds of the Placing primarily to reduce the leverage of the acquired company or business.”

The RNS announcement  just gave a couple of line so information about the directors, but press comment at the time [3], presumably based on the prospectus, emphasised the skills and background of Hugh Osborne and Alan McIntosh, the executives behind the venture.

In June 2011 Horizon acquired APR Energy, a US energy company! Hugh Osmond and Alan McIntosh then stepped down from the Board – presumably because there was little that their experience could bring to a US energy business. I have not checked, so I have no idea if this acquisition brought value to the original shareholders in Horizon. I merely point out that a US energy company isn’t exactly what they signed up for.

So, what is being done about this? Well, it’s tricky to regulate. A few days ago the Financial Services Authority issued the catchily-titled Enhancing the effectiveness of the Listing Regime and feedback on CP12/2. In a short section on ‘externally managed companies’ (apparently the new technical name for cash shells) they introduce rules to stop such shells taking a premium listing, and they tighten some regulations for the companies’ advisors. This doesn’t do much, although it does prevent such companies from becoming a component of the FTSE 100, which will mean that your index-tracker pension fund is no longer exposed to them. The problem the FSA has is that this is a legitimate business activity, and difficult to regulate.

The new regulation will limit ‘accidental’ investment in cash shells. But one really would hope that common sense would limit deliberate investment: buying shares in an unknown quantity on the strength of its (probable) management will always be risky.

Around the time of the South Sea Bubble there was a company that raised money “for carrying on an undertaking of great advantage, but no-one to know what it is”. Nobody would fall for that these days. Would they?

[1]  Knutsford raised about £600m to buy a struggling retailer, partly on the strength of the track record of Archie Norman, who had been successful at Asda.  He then left, for a political career. As far as I’m aware, Knutsford never bought a retailer, but it did acquire a small internet company.

[2] Regulatory News Service.  A London Stock Exchange service to ensure market news is released in an orderly manner.

[3] See for example The Telegraph, 12^th December 2009, 20^th January 2010

Posted 11 Oct 2012.  Typos corrected & minor textual changes 12 Oct 2012

Something Must be Done - but not a public inquiry

In the last fortnight we have seen the banks making the news for all the wrong reasons: excessive pay, tax avoidance schemes, manipulation of interest rates, mis-selling of complex financial products to people and firms who couldn’t possibly understand them, and massive failure of computer systems.  That last was an unfortunate matter, the others all appear to be indicators of a pervasive culture of casual corruption.

We are all agreed that something needs to be done.  Indeed, pretty much everyone says that the culture in banking needs fundamentally to change.  There is a call for a public inquiry. This, I think, is a mistake.

It’s not that I think the banks are right, or that nothing needs to change.  I just don’t think that a public inquiry will get to the bottom of things and facilitate the changes needed. [1]

We already know what happened.  On LIBOR, the FSA report is clear, and horrifyingly explicit about the arrogance and lack of conscience of the Barclays bankers involved in rigging LIBOR.  Various other reports have come out about the mis-selling and the tax avoidance.  And we have a lot of information about the huge levels of pay, and the bonuses that appear to be paid regardless of performance.

It’s not only Barclays at fault.  Nor just the UK banking system.  The LIBOR scandal involves other banks, and is also being investigated elsewhere.  The Financial Times yesterday mentioned: the FSA report, the Treasury Select Committee, regulatory inquiries in ten countries over three continents, an inquiry by the EU Competition authorities, and the work being done by the US Department of Justice and the FBI.  It’s not that we are going to be short of information on this.

A public inquiry will not provide any further benefit.  Indeed, it is likely to delay any reform of the system, as nothing would be put into place until it had finished.  It would cost a lot of money.  And it would not last the ‘one year’ that Ed Miliband is suggesting – banking is too complex for that.  Indeed, in my view banking is too complex for a public inquiry.  Leveson has been brilliant in exposing hacking and the rotten culture surrounding tabloid journalism.  But hacking is easy to understand; banking isn’t.  It will serve the public interest better if we let the various experts and regulators investigate these matters, and then make a full public report, with recommendations that are implemented quickly and in full.

We need a culture change in the banks, to return trust to the system.  This must start at the top, as an organisation’s culture and attitudes are driven by the signals sent from the boardroom and the top executives.  Bob Diamond’s letter to the Chairman of the Treasury Committee explained away the bank’s two efforts at rigging LIBOR (firstly to raise it and then to lower it) as being “wholly unrelated”.  This is a deliberately naïve statement that misses the point.  Any rigging of the system reflects the underlying values pertaining in the bank that he heads, in the department that he ran for many years.  An aggressive, results-driven organisation is prone to veering close to the edges of acceptability – and in this case, way beyond those limits – unless a clear steer is given as to where the line should be drawn and what is morally acceptable.

As Bob Diamond himself said, “culture is how people behave when no-one is watching”.  Well, we now know how they were behaving, and we hate it.

I spoke to a colleague of mine who works in change leadership, and asked him how this could be effected.  He gave me several points to consider.  Fundamentally, change  only happens if those within the organisation see the need for change.  If they don’t see it as urgent, it won't take place.  If the organisation has been successful (which in this case means profitable) through undertaking the flawed behaviour, then they won’t want to change. Likewise, if individuals are being rewarded for the results they are achieving, they will keep on doing what they have always done.  And finally, in this case fundamental culture change is likely to necessitate change at the top – a new CEO - both as a symbol that things will be different in the future, and in order to set the new path.

Action needs to be taken, quickly, to restore trust in a system that many now perceive as morally bankrupt.  Bob Diamond in his lecture last year said we should, “judge the success of … banks on the basis of broader measures and values”.  In that, he was right.

[1] Late addendum.  I wrote this entry after having been asked specifically if a Leveson-type inquiry was appropriate, and that was the focus of my comments.  But as I said above, the Treasury Select Committee is already involved.  I'm not suggesting that that is unnecessary - just that we don't need yet another body to look at it as well.

Bankers' Bonuses - some more considered thoughts

A few months ago I recorded a video for Cranfield, aiming to set out both sides of the ‘Bankers’ Bonus’ debate – why they should get bonuses, and why they shouldn’t.  I tried to be even-handed, but most people reckoned that I was far less convincing when arguing that they deserved them, than I was when I was explaining just why they should not be awarded. 

Having tried on Thursday night to defend Stephen Hester’s bonus at RBS – which resulted in a bit of a minor media storm[1] about my ‘pro-bonus’ views, I thought I’d like to restate the position, using more words that I was able on air.

There are two issues here.  One is the level of bankers’ bonuses in general, and one is the particular bonus for Mr Hester. 

As regards bankers’ bonuses in general, indeed, the whole top echelon of executive pay packages, it is difficult to argue that they are justifiable.  The arguments in their favour are weak, and mostly boil down to ‘custom and practice’.  We pay bankers a lot of money because we have always paid them a lot of money.  But being a banker is not riskier than being a soldier; it is not more stressful than being a nurse; it is not more physically demanding than … well, than most things, really.  Society has arranged itself in such a way that it values some jobs more than others; there is no logic behind it.

There is another argument against these bonuses: they don’t work.  Research indicates that bonuses can be very successful to motivate people to do better in low-level tasks that involve physical work .  They are much less successful in motivating performance in complex cognitive tasks.  Worse, the research suggests that giving a bonus for such tasks actually has detrimental effects on performance: the exact opposite of what we want.

So, logic suggests that we should change things.  But logic has only a small role in this.   Society does not change easily.  Governance experts (myself included) have endlessly discussed what might be needed to restore trust in our boards, and how the pace of executive pay acceleration might be slowed.  If it were easy, an answer would already have been found.  Back in 1995, the Greenbury Study Group thought additional disclosure would be the answer: ‘name and shame’ the highly-paid directors, and they would be humiliated into receiving less.  As we know, that didn’t happen.  The Government’s new proposals, set out by Vince Cable earlier this week, may chip away a bit at the edges of the issue, but on their own are unlikely to achieve the result desired by politicians and by a public which is being hit hard in a recession caused, by and large, by many of these highly-paid individuals.

The debate is not helped by a distortion of the facts.  A 2011 survey by IDS has been widely reported as saying that directors’ pay had risen by 49% in the year.  That is an egregious figure which, not surprisingly caused a great deal of outrage and distress.  However, Manifest, taking a closer look at the numbers has suggested that the calculations behind that 49% are misleading, and a better indication of the rise in executive pay would be around 12%.  That in itself may be too high - it's a lot higher than the rest of us are getting - but it would probably not have attracted the level of opprobrium of widely-publicised numbers.

Similarly, we hear the phrase ‘crony capitalism’ used to describe how directors sit on each others’ boards and vote each other high pay.  Now, I can refer you to several academic theories that show how this might happen: how people at a certain level tend to mix with others at that pay rate, and so this anchors their views of what is reasonable.  But if this is happening – and I suspect to some extent it is – it’s happening at a more subconscious level: there are very few cross-directorships within UK PLC, and people just don’t get to vote on each others’ pay in that way. 

I could say more about the pay debate – and no doubt at some point I will.  But I want now to return to Stephen Hester, whose bonus I was defending in the media.

First some facts.  Mr Hester was not responsible for the mess that RBS got itself into.  Indeed, he was not even a banker at the time it happened – he was the well-respected CEO of a large property company.  But, his track record as a banker in earlier years, coupled with being untainted by the so- called ‘credit crunch’ meant that he was invited to become a non-executive board member of Northern Rock and the RBS, and then, a few months later, invited to take over the top job at RBS.

Not many people would want that job.  Company turnarounds are not easy at the best of times.  The job Mr Hester was brought in to do – de-risk the bank, restore it to eventual profitability, sell off parts of it – is a complex one, made more difficult by the fact that we, the public, own it, and so politicians and the media take a close interest in every move.  As I said, not many people would want the job; and probably only a few of those who wanted it would be capable of doing it.

In recent days it has been argued, quite reasonably, that because we own RBS, Stephen Hester is a public servant and as such should be on a salary much lower than his £1.2 million, and with no bonus.  Public sector employees all over the country have faced huge pain: so should he.  Whilst I appreciate the emotional appeal of this argument, I think it’s a bit disingenuous.  He wasn’t employed as a public sector worker; he was employed as a banker.  He agreed a contact at a certain level of salary, and with the possibility of a bonus.  And whereas we wage-slaves might gasp at the size of the numbers being discussed, in the world of bankers it is, I’m afraid, relatively low.  Set in the context of an industry where the CEO of Barclays got a bonus of over £6m last year (with more rumoured for this year), and where the CEO of Lloyds would have been in line for bonuses of about £2m (ill-health and a leave of absence meant that he waived all right to that bonus), the RBS bonus (which was undoubtedly kept below £1m for political reasons) is not extraordinary.

There has been much call for Mr Hester to waive the bonus or to give it to charity.  Well, he chose to waive his 2009 bonus, which would have been in excess of £1 million.  That was a generous gesture: we may argue that the bonus was too high, but most of us, given the chance, would have taken the money.  As to giving it to charity – what he does with the money is his business, not mine.  For all I know, he could give most of his pay to worthy causes, but that is between him and his conscience; it is not for me to judge.

Two final points on that bonus.  Everyone is speaking of £963,000 bonus as if it will be piled up on his desk in crisp fivers.  That’s not the case.  He has been awarded 1.6 million shares which, at that day’s price, were worth about £963,000.  But those shares are in a ‘bonus bank’.  What that means is that he can’t touch them until 2014.  If between now and then the bank’s performance get worse, the shares will be ‘clawed back’.  In the same way that he was awarded them for what the board saw as ‘good’ performance, he will lose them for bad performance.  Oh, and even if he keeps all 1.6 million of them, he won’t get £963,000 – what he actually gets will depend on the share price in 2014.

Personally, I hope that by 2014 Mr Hester’s bonus is worth several million pounds.  If that’s the case, it means that the share price will have recovered enough to repay the taxpayer what we invested in it.  And that can only be a good thing.

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[1] 11 interviews in 24 hours is probably normal if you are a public figure, but quite a big day if you’re just a finance lecturer.