Rewarding failure
Once again, I see people fulminating about “top execs” being “rewarded for failure”.
As someone who has had some exposure to the processes behind executive compensation in several small corporates, I feel slightly more qualified to comment on this than many of the armchair critics.
The truth of the matter is that firstly, of course, many executives are not being “rewarded for failure”. By far the majority are being rewarded for successfully either meeting targets, growing a business, gaining market share or sometimes even “just” keeping a business above water is actually a success.
Secondly, executive bonuses are contractually agreed, and often negotiated around things that the executive knows he can achieve, rather than things that observers might regard as “success”. This failure, as with many others, can be squarely laid at the door of “Yoomin Rezawses” with their overweening sense of self-importance without the business nous (in most cases) to understand the premises and consequences being discussed.
But be that as it may, the contract is in place, and as distasteful as it is to contemplate Fred the Shred (or whoever) getting a massive payoff, he has achieved what he signed up for and the business is legally obliged to pay him every penny.
Lower-level employees are perfectly entitled to haggle with HR about their bonus plans, but of course, they rarely do. And in many cases, the bonus is agreed by the union “representing” the employee, so there is even less wiggle room. However, if you as a bank clerk were legally entitled to a £1000 bonus, and didn’t get paid it because your bank was doing something naughty or whatever, you’d be screaming blue murder. Legally and contractually, there is no difference, and rule of law is something we’re all behind. I hope.
And finally, there is the particular hatred of bank executives. I don’t really understand this. Buoyed by increasingly expansive government policies over more than a decade, they got reckless. However, all banks at all times were entirely compliant with all the reams of regulation laid down by governments, the EU and other international organisations. If the regulation really was going to protect us, it would have done, but it spectacularly failed to do so.
Furthermore, that monumental idiot Gordon Brown got so panicked by the idea of a bank failing after a decade of his policies that he decided to prop any shaky bank up. Instead of letting Northern Rock go to the wall pour encourager les autres, he protected his ego by declaring banks “too big to fail” and shovelling insane amounts of taxpayer dosh at them for ever and ever, amen.
And frankly, if you were looking at the prospect of a complete failure of your business and someone offered you all the money you could eat as a consequence of your failure, what the hell would you do? No risk, no arrogance is now out of bounds, because the state, the government, the rulers of the little people has decreed you above the consequences of your risk-taking.
Really, what did anyone think would happen?
HR, executive compensation boards and institutional investors are mere amateurs at the game of “rewarding failure.”
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November 27, 2011 at 18:19 -
Thaddeus
It might be interesting to hear your experience where a top paid exec’s performance is connected with a substantial loss that comes to light after the bonus has been paid. Breach of implied terms? Breach of fiduciary duty?
Then, even if, objectively rather than not wanting to rock the comfortable boat, it is accepted that Tom, Dick or Harry the Shred had bulletproof contracts and do get retire comfortably albeit with fewer invitations to corporate or other social events, or non exec directorships over the next few years than they might have hoped, why have their sucessors, and the ones yet to come, got the same security?
Put another way, they are hired to run a long tail risk, and, finally, get caught short. Should they be free of any financial consequences, and, if so, what is the justification?
Any thoughts?
Bertie
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November 29, 2011 at 09:55
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November 27, 2011 at 18:44 -
RE Fred the Shred— its a bit like rewarding a Waffen SS guard for killing so many undesriables— yes he did get the job done in the prescribed time. Many of those who command high bonuses set the targets ,make sure they are met at the end of the year, claim the bonuses and parachute out before the shit hits the fan.
Sorry if you act like a shit , talk like a shit , smell like a shit— then you are a shit. Weasel words dont make it any better-
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November 28, 2011 at 04:55 -
I said something similar to Thaddeus a year or so ago wrt Fred the Shred. I think it was something along the lines of hoping he’d fall down a flight of stairs and land squarely on his balls, but if his contract signed in good faith by all parties was retrospectively torn up then no contract is safe and everyone’s in trouble. Letting him and any other CEO/failed banker have what they’re entitled to is the lesser evil. If Goodwin’s own terms were a bone of contention because RBS had become nationalised the government should have firstly found out before the bail out, and secondly made a renegotiation a condition of RBS being hosed down with taxpayers’ money. If they didn’t, well, caveat emptor or whatever the Latin is for reckless twat of an unelected Prime Miniscule.
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November 29, 2011 at 10:03
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November 27, 2011 at 19:12 -
Spot on. I could not have put it better. I know I could not have put it better as I do not have the intellect or am I that articulate. Pity others do not acknowledge their abilities limitations and stop spouting inane, irrational and subjective nonsense and pack up their placards, tents, their superiority complexes and their insufferable know it all holier than thou attitudes and bugger off.
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November 27, 2011 at 19:13 -
The mantra “if we don’t pay them these huge salaries with the oh so generous perks and pensions, they will seek employment in other companies or other local government areas”
Boy, would I like to test that theory.
Your post does not touch on the subject of “fast track” promotion where bright young things, without real life/business experience, end up as useful, compliant idiots.
I use as an example the RN warship that hit a well charted rock off the coast of Australia. The Captain, aged 35 had gone ashore leaving the ship in the hands of a 28 year old 1st Lt.
I won’t mention the nuclear submarine that “went aground” in well charted home waters.
Election candidates are now selected at “Party Headquarters”, parachuted into a constituency where the chances of them being elected are high – bingo, compliant and useless MPs.-
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November 27, 2011 at 19:20 -
Well said Patrick— a young RN captian who fu*ks up will be held to account. Our bankers will just ” shuffle the pack of cards” and award themselves big bonuses.
I have a lot of sympathy for the young RN captians by the way
Everyone make mistakes— its just some dont alaways profit from them -
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November 28, 2011 at 01:42 -
The problem with “bright young things” is that even though they are very (book) smart, they have no idea how the real world works. Recently I came across a PhD in Construction Engineering he had the sum total of 6 months (as a sandwich course student) of site experience. You really cannot make it up…..
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November 29, 2011 at 10:05
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November 27, 2011 at 21:41 -
If the contactual obligations for the “Fred the Shreds” of this world are so sacrosanct, why can the contractual pension arrangements of the public sector be altered at government whim ?
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November 28, 2011 at 05:16 -
In principle I’d agree 100% for the reasons I gave above – if contracts can be altered unilaterally everyone’s in strife. But do we know for sure that the government isn’t acting within the limits of those contracts? I don’t, but if it isn’t I’d have thought the unions would send in lawyers rather than strikers.
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November 28, 2011 at 08:16 -
Ditto those on benefits. Even Peter Lilley, hardly a wet, when in charge of the DHSS, changed rules for new claimants rather than existing ones. It seems the Government can change whatever it wants, whenever it wants. And before you start moaning I’m just a lefty, Labour were worse at this than the Tories. Contracts between the Government and citizens seem to be in favour of one side only – just look at the raising of the retirement age for example.
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November 29, 2011 at 10:07
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November 27, 2011 at 21:49 -
Can’t help thinking that, if it had been ‘Southern Rock’, based in Tunbridge Wells, rather than the Northern one based amongst all those friendly loyal voters on Tyneside, then Gordon might just have let it fail……
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November 28, 2011 at 06:27 -
Some years ago, the CEO of the Canadian company I worked for, got the chop after nearly taking us the wall.
He walked away with $2million Canadian.
You still see this, and it is very much in evidence in the Public Sector.
Mudplugger. Quite. Northern Rock was saved as it was a “Labour” bank.
Ken Alexander. Because we really really really cannot afford them any more. If you don’t get that, well… As one who has seen his private pension comprehensively destroyed, please do shut up. So you have to pay more. You are still getting a damn good deal.
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November 29, 2011 at 11:24 -
Ah. The old “my pension is sh*te, yours should be as well” argument. I wondered when that would be wheeled out. Remind me who it was that destroyed your pension – Gordon Brown? Casino Bankers? Surely not public servants?
It is not just increased payments that are being asked for but also reduced final benefits and longer to accrue them. Grossly unfair when it is part of an employment contract allowing you ( quite reasonably) to plan for your retirement.New entrants (after a set date)know exactly what they will be signing up to and this would be fairer.
Do you honestly think any of these savings are going to end up making public sector pensions “affordable”? Nope. Straight to the Treasury to help support banks bailouts, offset the loss of tax if the 50% rate goes, maybe even to support you on your “lotto” pension scheme.
Thank you for your invitation to shut up but I feel I must decline.
Ken.
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November 28, 2011 at 08:11 -
That’s all very well Thaddeus, but not a single one of the wankers has faced any prosecution for what was honestly speaking, fraud. They get to keep their bonus and avoid the consequences of shilling their investors and customers. Just look at this example about HBOS and maybe you’ll understand why banker equals wanker (actually, let’s be honest, cunt), for many:
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November 28, 2011 at 09:46 -
The politicians who set up the tri-partite regulatory regime of BoE, Treasury and FSA in such a way that none of them knew who was responsible for what have not been prosecuted either. Given that the change was made so that the politicians could ‘divide and rule’, they are the greater sinners.
Before anybody says, “It was unforseen” – it wasn’t. When Eddie George was informed of what was to happen, he blew his top, and had to be talked out of resigning as Governor of the BoE on the spot. He predicted then that something like this would result. Sadly, he was proved right.
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November 28, 2011 at 08:31 -
Remuneration committees typically benchmark executive pay against the mean, leading to a persistent Lake Wobegon effect – when the executives in one sector strike it lucky, dragging up the mean. Remuneration committees should be aware of this upwards-only bias and put circuit-breakers in place: for example, by benchmarking against the third quartile. Remember that, by definition, 50% of executives underperform.
Shareholders and their fund manager representatives do, of course, have the option of voting against re-election of EACH member of remuneration committees that fail to put in such circuitbreakers. This fund manager has been doing so for several years. A nuclear option, certainly, but one that has the potential to grab the attention of complacent NEDs.
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November 28, 2011 at 09:29 -
Why aren’t these CEOs just paid a salary? Why do they need to be ‘incentivised’ with bonuses if they are aready the motivated, driving personalities that we are told they are?
Surely it is the ‘workshy’ on minium wage that need ‘incentivising’?
I do wonder if some of these top level ‘contracts’ are good for the companies anyway. For example they might offer a 100% bonus if the share price goes up 20%. So the CEO sacks 3,500 people ‘lowering costs’, the market rersponds, the CEO pockets the bonus and moves on. The company finds itself with no R&D and no sales staff and plunges into terminal decline. Well that is because it no longer has the inspired leadership of its ex-CEO isn’t it?
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November 28, 2011 at 10:06 -
There are far too many examples of highly-divergent rewards to management and shareholders. One radical way of reducing costs would to fill CEO positions by reverse tender, bearing in mind that, in general, ‘the role defines the man’, and not ‘the man defines the role’.
BP (say) needs a new CEO, so the board sets a minimum qualification –the IOD’s Chartered Director status springs readily to mind. Appoint the candidate requiring the lowest salary without interview (no bonuses or termination payments beyond statutory minima). The post would probably be filled by a very capable woman for £200,000. Job done. Repeat the process as necessary at more junior levels, and watch the share price rise.
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November 28, 2011 at 10:05 -
If a company goes into administration or receivership, the first thing that happens when the administrators arrive is that the former directors are politely instructed to leave the premises – permamently.
In the case of the banks, action was inconsistent. Bradford and Bingley was allowed to fail. The depositors’ funds and mortgage book were parcelled up and passed on to another bank, the rest disapperaed. The small shareholders lost the lot. Presumably, the directors got nothing bar a P45 either. So why the different treatment of Northern Crock, RBS et. al.? Can only have been for political reasons.
I think there’s a difference between people who have built a company from scratch (perhaps taking considerable risk with their own capital and taking only small rewards for many years), and ‘hired professional managers’. The former are entitled to reward for their risk and effort, the latter take little risk, so perhaps should expect lesser reward.
Executive reward generally has got a bit out of hand, maybe as some of them ‘cashed in’ on the boom years. Now it looks like lean years ahead, we might see a growing trend to companies restricting executive reward. How much does someone actually need to enjoy a pretty comfortable life, anyway?
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November 28, 2011 at 10:30 -
JSA is £67.50 a week. Some people think the unemployed have a comfy life (though I don’t agree), so I guess a pretty comfortable life could be had for not much more…
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November 28, 2011 at 11:10 -
Be careful – if you pay peanuts, you get monkeys. We need successful companies – failing ones yield little tax revenue.
Perhaps pay restraint should start in the public sector. Director General of the BBC Mark Thompson enjoys reward of close to £1million a year. Why? The BBC does not have to earn it’s income – it’s guaranteed through the licence fee. The directors of private sector companies rarely have a guaranteed income for their companies; they have to compete for customer loyalty, market share and sales.
My own view is that nobody in the public sector (including the BBC) should be paid more than the PM. I think his salary a tad low – perhaps £300,000 a year might be a sensible level. Private sector CEOs, if their companies do well, might expect more, and if they’ve lived through lean times building their own company, perhaps much more.
There must be incentive for hard work, ambition,skill, enterprise and experience. If you pay everybody just a subsistence living, you end up with the USSR – and look how that worked out….
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November 28, 2011 at 12:16 -
Fair comment Engineer.
I don’t think there are vast numbers of grossly overpaid CEOs etc.
I don’t support those that are, nor the cosy arrangements for the easing out of the dishonest or incompetent.
We didn’t mention council chiefs did we, by the way?
I also think the further down the pyramid we are, the less we know about what the top man has been appointed to do, and how much of a gamble it might be. There is no future in business without change. But we’re just know the bosses are incompetent and overpaid.
If the plan is to restructure, dispose of, or close a business with no future, it isn’t going to win a lot of friends downstairs.
Sometimes bonuses and salary level come for doing unpleasant and difficult things.
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November 29, 2011 at 00:30 -
I like the general assumption that there exists a right to meddle for everybody.
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November 29, 2011 at 03:40 -
Not going for the popular vote, then, Thaddeus?
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November 29, 2011 at 10:11
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November 29, 2011 at 12:04 -
Boardroom greed has been an issue for some time. During the second wind of the railway boom (c.1925) the directors of the GWR were paying themselves an average of £65,00 a year. In 1925.
The trick is to set modest targets – usually revolving upon the maintenance of the share price – so that the CEO remuneration package is really little more than a variation of Danegeld; in this case:
“Pay me, or I’ll issue a profit warning…”
Significant that few of these people seem to have a stake in the businesses they run, except on a contingent basis. And, when their options are vested, they sell the stock and become Gurus.
Bollocks.
The reason for these breathtaking deals is that when the shit hits the fan, the person(s) responsible will never work again. Ideally; but they often do, as they have learned the game. No senior person withing LTCM – the architects of one of the biggest fuckups in financial market history – is at present out of employ. Would I give them my assets to manage? But somebody does…
When I worked on Wall Street, there was a axiom:
“Don’t bother looking for a clever commercial banker; all they do is hope for the best, trust the mortgage market and go for market share. When you do meet one, you are on a very fast track indeed, but most of them are dumb as shit.” Or, words to that effect.
Some very good suggestions above, by the way; I particularly like the Dutch auction model. Frankly, next doors’ cat could run a retail bank and would accept a bowl of cream as a reward. This stuff is not difficult!
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November 29, 2011 at 12:09 -
P.S. – sorry about the typos…
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