Chairman of RBS had an “out of body experience” over bank bonus payments while head of the TUC thinks performance pay is a “big con”
Does performance-related pay work? High Pay Centre conference at the Institute of Directors on 11 Nov 2013
Sir Philip Hampton, chairman of RBS, gave a rare insight into the pressures on the top management of banks when he told our conference of a banker who’d complained about the unfairness of being awarded a pay package worth £4m. Sir Philip described it as an “out of body experience” for him when the unnamed banker said he was being treated “very, very unfairly,” as a rival at another bank doing a comparable job was being paid £6m.
Much of the discussion about pay is about fairness, but it is all relative, he said. “Markets are not fair and they never set out to be fair.”
Sir Philip is sceptical about whether bonuses motivate executives to run their companies better “Let’s make no bones about it: it’s really hard to make incentives work and very difficult to make them effective. Simple targets don’t sit very well with a complex business and what you think is the right target now may change, and even more so with long-term incentive plans.”
“In my view, the whole process of incentivisation is over-rated…Most business people don’t get up in the morning, thinking ‘I’ve got to do this today to get my bonus’.” “It doesn’t drive behaviour; I’m not saying it’s useless, just saying it’s over-rated as a tool.”
However, Sir Philip does believe that alignment with shareholders is an important part of performance pay. “Most of the big rows about pay are about high pay and lousy performance.” Structurally, he said, it should be quite easy to achieve alignment, especially if you add clawback as an extra challenge.
The whole concept of a bonus has become undermined in recent years, Sir Philip said. “20-30 years ago, a bonus was about extra achievement, but a target bonus is a corruption of the original term: the bonus becomes not about exceptional achievement, but part of the package. It drives comparability at the cost of distorting what the bonus was originally meant to do.”
“Bankers take the biscuit in this, the expectation of a bonus has become embedded in the past 10 to 15 years. There is an expectation that the bonus will be high, come what may.”
Sir Philip said the fundamental issue over performance pay was for the owners of the business to decide.
Speaking for the owners, Robert Talbut, chief investment officer at Royal London Asset Management, described the word bonus as a very toxic phrase. “I understand the bewilderment about the overuse of the word bonus; it’s a very toxic phrase and is seen as a reward for an individual just doing their job.”
But he believes executives do respond to incentives, both financial and non-financial. “Shareholders recognise that we currently do have financial incentives and there’s no magic wand to sweep them away, but we need to make them work better in the interests of the company and shareholders.”
Investors want to see rewards simplified. “Shareholders argue against complexity and the lack of differentiation between good and mediocre performance. One of the biggest problems is that people who have turned in reasonable performance are rewarded far too much.”
Our panel was asked to vote on whether they believe performance-related pay worked. Three of them – Philip Hampton, Simon Patterson and Robert Talbut put up half a hand. Frances O’Grady and Stephen Bevan do not believe it works.
Frances O’Grady, head of the TUC, said there was no compelling evidence it works “Increasingly people think it is a big con.” Prof Stephen Bevan from the Work Foundation, said performance-related pay eroded “teamwork, reinforced short-termism and encouraged an ingratiating personality.”
Simon Patterson, remuneration expert from Patterson Associates, said good chief executives were worth high pay, but there was a need to retain long-term incentives even though they are unpopular.