Executive Remuneration: The Age of Excess

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Sarah Jane Leake | Bloomberg Law What are we paying for? Exploring executive pay and performance – High Pay Commission Discussion Paper, 5 September 2011 The concept "pay for performance" has dominated corporate governance culture over recent years. However, while corporate governance reforms have tried to align directors' and shareholders' interests by linking pay to performance, the UK's High Pay Commission's (HPC) latest report1 reveals that there is in reality little link between a director's incentives and the way in which a company performs. Statistics show that, over the last decade, the average annual bonus for a FTSE 350 director increased by 197 percent while the average year-end share price fell by 71 percent. Is the link between pay and performance therefore merely illusory?

Corporate Governance Reforms

Some 20 years ago, Sir Adrian Cadbury was asked to develop the first corporate governance framework for the UK. The report2 was published in 1992, and the principles articulated therein have guided corporate governance developments ever since. One of his recommendations, which has had lasting effect, stated that boards "should appoint remuneration committees . . . to recommend to the board the remuneration of the executive directors in all its forms, drawing on outside advice as necessary."3 While it was thought that this would help curb executive excess, such expectations were premature. Concerns over "fat cat" salaries resurfaced during the mid-1990s, sparked by some big pay rises for the executives of the country's recently privatised utilities companies. To help calm the public storm, Sir Richard Greenbury was commissioned to further develop a corporate code of best practice.4 Accepting and building on the principles set out in the Cadbury Code, the Greenbury Code emphasised two further themes that ended up shaping the future of executive remuneration – pay for performance, and the alignment of shareholder and director interests. The Greenbury Code, however, failed to restrain pay at the top and dampen public disquiet. Further committees were subsequently set up by the Government in order to tackle the problem. As a last resort, in 2005, the Government amended the company law legislative framework, to put remuneration disclosure requirements on a statutory footing.5 Amongst other things, quoted companies were required to publish a directors' remuneration report as part of their annual reporting cycle.

The Financial Sector

"Nowhere," comments the HPC, "is there a clearer example of corporate failure than in finance."6 In 2010, the average total earnings of executive directors in state-supported banks amounted to just under

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