Anthony Hilton: This executive pay farce will only end on the moral high ground

People split into two camps on executive pay. One group says levels are obscenely high and can’t be justified. The other says the pay is high but only as a result of outstanding performance.

The argument is that shareholders don’t mind paying because the company has grown in value so much they don’t mind sharing a bit of the extra wealth with the person responsible for creating it.

The problem with the second position is that most executive pay packages are so complicated that no one on the outside can understand what targets have been set, whether meeting them requires any unusual level of skill or effort by the executive and whether they are particularly relevant to the business in the first place.

In short, they don’t really know if any extra wealth has been created in the first place.

It also looks as if the system is a joke.

According to the big accounting firms who monitor these things, executives consistently collect around 70% of their maximum theoretical bonus whatever happens. This implies that the whole exercise is a fig leaf.

How it works is that there are so many performance targets in the mix that the executives concerned are bound to hit enough of them to ensure they clean up. They may not have been able to boost profits but they managed to park their car for a year without scratching the one next to it.

In this way the system is structured so that, come rain or shine, and provided they don’t behave like complete idiots, they will collect 70% of the maximum. The bonus system is justified because it is variable and uncertain.

But it seems never to vary and therefore it is not uncertain. One is left with the feeling that the whole exercise is really just a cunning plan to confuse the lower orders over how much the company wanted to pay its chief executive in the first place.

Though it is too polite to say so, the Investment Association — the trade body for the fund-management industry and therefore representing the shareholders — has worked out what is going on.

So, the other day it launched a plan to strip away the confusing complexity in pay packages, and to formulate a few simple measures which would show clearly whether the person concerned had done something unusual.

It is still early days and how this will progress remains to be seen, but the Association’s working group has some high-powered people involved — Nigel Wilson, chief executive of Legal & General, and Sainsbury’s chairman David Tyler, for example.

This suggests that if the will is there, they should be able to crack it.

But then they will have to get their proposals adopted by companies and at that point they will, no doubt, face spirited opposition from remuneration consultants.

These rather like the present system where they get paid large sums for designing schemes no one else can understand and then demand even larger additional fees for making these “more competitive” than the similarly complicated schemes designed by another consultant for the firm next door.

It is a brilliant system because the consultants have convinced their clients that they are so important that they should be in the top quartile of payers. Of course in any one year only a quarter of them can be, but that means the rest of them are banging on the door looking for ways to do more.

So, a simplified system will be a tough sell and arguably the fund managers’ chances of success might be better if they could occupy the moral high ground — making sure their own pay is perfectly transparent and demonstrably aligned with the interests of their customers.

This, however, is where it gets tricky. It turns out that some time ago, the Investment Association proposed its fund-management member firms publish this data on the web. But the industry has shown a marked reluctance to do so.

This is a pity. Fund managers may not all earn as much as chief executives but they still get a lot more than most doctors, lawyers and other professionals. And of course most of them fail to perform. They are, of course, entitled to every penny of the hundreds of thousands they earn but it would be interesting to know how they are judged.

For example, there is — or seems to be — a strong correlation between fund size and pay packet.

People who manage big funds get more than people who manage small funds regardless of performance.