Pinstripe: The trouble with pay

Those who dislike this trend (most people) feel it is just fundamentally unfair and unwarranted - a merry-go-round for the boys (and girls) at the top rewarding each other. Those who seek to defend it point to the need to compete internationally, stringent performance targets before bonuses are paid and the small proportion of the value created which is received as reward.

The debate is important because the public’s suspicion on this topic is the corrosive acid which undermines public faith and trust in our companies and institutions. This is unhealthy and leads to pressure for politicians to “do something” and generally what they do is pass daft and counterproductive laws.

Is there in fact a problem? Is top pay really too high? I think there is a problem - pay is higher than it needs to be - equally excellent people would do it for less money.

30 years ago CEO’s of companies felt that their main role was to lead the company, often one which they had been with for many years and where they expected to stay for a long period, perhaps until they retired. Now, especially in publicly quoted companies, the position is quite different. A CEO is often new to the company, will commonly be there for less than five years and they see themselves more as the representatives of the owners rather than the leaders of the company - an entirely different mind-set - not all bad - but which tends to focus on short rather than long-term goals, with one of those goals being their own career advancement.

The people who are recruited have also changed. Will Manchester United’s next coach be the former coach of Aberdeen - no - despite the excellent record of the previous incumbent who made that journey. Instead they will go for the proven “star” - by definition in short supply - and boy will they have to pay. The same is true in the corporate world where the culture of promotion from within has been eclipsed by the practice of buying in people who have been successful elsewhere. As in football this approach is often a bit of a disaster. Look at Andy Hornby (shopkeeper) at HBOS or Fred Goodwin (accountant) at RBS - not altogether happy outcomes. There are some great exceptions - and surprise, surprise, where the bulk of the company’s key executives have been with the company a long time and really know their industry things tend to go pretty well - look at Stagecoach as a good example.

A key culprit of ever rising pay in public companies is the recruitment process. The non-executive directors, who don’t really understand the business and its culture because they have got to be so independent and short-term in the job to comply with misguided rules on corporate governance, select the new CEO. They employ headhunters - who also don’t really understand the business and whose fees rise as salaries rise (so guess what happens!) and who generally know only those who wish to be known i.e. those who push themselves forward or keep moving jobs. The non-executives want a top quartile performance - so they pay top quartile money and imagine that will translate into performance. The result is more money being flung at less people to dubious effect.

The answer is not legislation. The answer is that companies should take the risk of recruiting a CEO that nobody has ever heard of, preferably from within, somebody on the way up rather than going sideways and just offer less money, they will still come.

No way Jose? - probably.

Pinstripe is a senior member of Scotland's financial services community.