Carl Mortished: Higher pay for top bosses doesn’t deliver better results

Van Beurden’s pay is interesting because most of it is bonuses. His salary was €1.49 million, whereas variable pay — according to the annual report — was just over €7 million, comprising the annual bonus of €3 million and €4 million in his long-term share plan. Most of his package is paid in Shell shares.

Investors think this is good: chief executive pay should be variable, subject to performance and payable in shares. They reckon the boss’s interest should be aligned with shareholders but they are wrong; big carrots and rewards set a skewed agenda, encourage bad attitudes and incentivise behaviour that is at odds with the long-term interest of the company.

The political flavour of the moment is pay ratios. The Government wants to force companies listed on the Stock Exchange to publish the ratio of the pay of the chief executive compared with an average UK worker. In 2016, for FTSE 100 bosses, that ratio was 129:1. It’s easy to see how that conjures up images of troughs and porcine men with swelling waistlines. However, the key issue is not the difference in pay, but the perception that the boardroom is a place apart, separate to the workplace, where special people live according to different rules.

The boss should not be aligned with the shareholder; the chief executive should be aligned with the company. One oddity of the ratio obsession is that the chief executive of the John Lewis Partnership, an employee-owned organisation, has a much higher (worse) pay ratio than that of Goldman Sachs.

What matters, however, is not the pay differential but whether the cashiers at Waitrose or the junior bankers at Goldman believe the boss has their interests at heart. Is the boardroom working for them or floating in some glass bubble half a mile above the shop floor?

Aligning the interests of the general with the troops is all very well but investors want good financial returns and don’t care much about what the staff think. The answer is to have a hard look at the behaviour of chief executives in very big quoted companies.

High rewards don’t deliver better results. According to an analysis by the Wall Street Journal of pay at S&P 500 companies, the 10% of chief executives who got the biggest pay rises delivered only middling shareholder returns, and the top 10% of companies for investment return only ranked in the middle for chief executive pay. What we know instinctively is absolutely true. The most effective managers and leaders are not led by the nose by cash.

Moreover, the right chief executive for a Shell or a Barclays is not a serial entrepreneur, nor a gambler, angling at every opportunity for an extra half per cent. Such behaviour would wreck large enterprises with complex human or physical infrastructure that cannot easily shift direction. It is a deeply unfashionable idea but most multinational enterprises are more like a civil service than a buccaneering business. True entrepreneurs soon quit the mother ship to set up their own venture, and so they should.

Bosses of big companies don’t need prizes; pay them an impressive salary and expect them to deliver. If they don’t perform well, just sack them.