Executive Compensation Scrutinised By Treasury, Hypocritically Criticised By Shell CEO

Executive compensation is one of the hottest topics post-crisis, because not only does it have the power to incentivise executives to actually keep their company stable and profitable, but it’s also something we proles can easily understand and get mad about. So in terms of PR exercises, announcing that you won’t be having a bonus this year is a pretty easy way to get the public to love you again.

Guy Hands got it right – he announced that he wouldn’t be having a bonus in the company’s annual report, and then quietly buggered off to Guernsey to avoid tax. Slick. On the other hand, Jeroen van der Veer, the outgoing pot-shaped chief exec of Shell, has called up the kettle and told it that it’s black – after receiving an $1.87m bonus that wasn’t tied to performance, and a 50% increase in salary, he said that compensation not based on results was a bad thing. 

“You have to realise: if I had been paid 50% more, I would not have done it better. If I had been paid 50% less, then I would not have done it worse”, he told the FT, to which the world’s bankers hissed “Shut up, shut up”. The fact that he hasn’t paid back the bonus, or any portion of his €10.8m salary, rather takes the gloss off. But at least he’s refreshingly honest, and articulates the key question – at what point does a salary truly incentivise hard work?

His comments come just as executive pay comes under government scrutiny. The U.S. Treasury is set to outline plans tomorrow on how the heads of bailed out banks are to be paid – a shift away from the model of potentially massive rewards for risk-taking, and a fat salary even if those risks don’t pay off. The Treasury is hiring attorney Kenneth Feinberg to sort it all out, the guy who oversaw the doling out of money to 9/11 victims.

Hopefully this will mean rather more radical action demanded of the banks than what they’ve been doing so far, which is to cut bonuses only to increase salaries. While it’s bonus culture that breeds potentially damaging risk, an inflated salary that only inspires year-by-year performance won’t solve the problem. The case of Nomura that we looked at recently, where the Japanese bank is changing its compensation culture towards bonuses to reflect the practices of Lehman Brothers which it inherited, is worrying – it shows how totally in thrall to the bankers’ demands the banks currently are. 

Will compensation models change beyond the boardrooms of the financial services industry? Even if pay drops off at that particular level, the cachet of the positions will still be a draw; if it drops off across the banking sector, will talent want to stay, or will it move into less scrutinised areas, like management consultancy, law, energy, commodities? While it’s easy to legislate against banks that you part-own, it’s going to be much more difficult to create a unilateral executive (and non-executive) payment attitude across various industries; and despite the impact of the recession, companies aren’t going to self-regulate.

As the FT notes today, high salaries can make a company healthy, even if its in a roundabout way: “If a company pays the chief executive a comparatively low salary, analysts might conclude that he is not up the mark and will downgrade the stock. If, on the other hand, the company boosts the salary significantly, investors might conclude that the chief executive is a superstar, and the share price might jump. If the increase in the stock price is greater than the increase in the chief executive’s salary, this could be a wise move by the company.” OK, so the stock might have a fillip, but the salary doesn’t necessarily incentivise the executive into ongoing performance. Short-termist smoke and mirrors needs to go, while emotional investment and loyalty from executives needs to rise.

Posted by Ben Beaumont-Thomas in Hot Money | June 9, 2009 11:26AM |