Is the Executive pay gap really ethical?

This week Financial Times reported on the shareholder resistance that came up against BP's Bob Dudley's 20% pay rise. Hardly surprising, seeing at this pay rise will have come out of money they invested, or at least money that could otherwise have go to them in dividends. 

Excessive pay within higher management has been the main obstacles that businesses have face in building and maintaining trust. Be that for shareholders, and more of a general perception of the business. Personally, when I hear that a CEO has given themselves a nice little pay rise, or bonus for that matter, I do become a bit more wary. Not necessarily for the business itself, but more in the sense of "is my money just going straight into their pocket?" I'd like to think that the money I'm paying is in some way going to help the company grow, towards sustainability or something similar. Not going towards paying for a nice holiday home in the Bahamas. 

The FT also states the excessive pay gap is so out of line that CEOs "risk being treated like aliens". I think that fits in quite nicely with the terms "out of touch with the real world" and "how the other half live".  I think it is true that many CEOs may almost appear to be in a world of their own and have no concept of working to get by. Yes, I agree that many will have worked hard to set up and grow a business and will have put in the hours to get to where they are now. But how do they decide on these pay rises and bonuses? Do they get into work one day and think "oh good job this week, you deserve an extra £1m!"? And why not give everyone a little extra?

It is argued that no single solution will fully bring the pay gap down, however FT suggests a few possible ideas that, when used together, might just work.

Firstly, reduce complexity. There are many different standard for accounting used around the world, meaning what is seen as unethical in one country may be acceptable in another. It is also argued that many remuneration committees often do not understand the value of what they are handing over. Not necessarily due to them being lazy or not caring, but because it is nearly impossible to calculate. I understand that calculating and keeping track of all the wages and salaries within a company can be difficult, but surely they will know if the company can afford excessive pay rises and how this may look to investors and the public?

Secondly, making transparency work in favour of restraint. If companies benchmarked their pay and targets against similar companies, they will be able to ensure that no unwanted attention to drawn to them over pay gaps. However, this can often lead to the Lake Wobegon effect where nobody would want to be paid below the average amount. If everyone is using each other as a benchmark, how do you set the initial pay level?

Thirdly, and most importantly in my opinion, link CEO pay to the performance of the company. This seems pretty straight forward to me. Everyone has their initial set base pay, then pay rises or bonuses can be given according to how well the company has done that year. This may help directors think a little bit more about where the money is coming from and how it is affected by performance.

I know I have spoken quite harshly about CEOs so far in this blog, so I believe it is also worth talking about Richard Pennycook, CEO of Co-operative. Earlier this month he insisted on taking a 60% cut in his base pay following the Co-op's turnaround. Whilst I do think that 60% may be a bit excessive, this is the kind of lead that CEOs should take in terms of pay. It is likely that CEOs will be on a hefty pay package, far higher than other workers, so if the company is facing financial troubles, is it really so wrong to suggest that they sacrifice just a small percentage of their pay?

My final note on this is that companies should consider how their values are reflected in their pay policies. If the company is promoting an ethical brand and equality, a large pay gap doesn't really reflect this. It should also be noted how a company's pay policy can  impact their license to operate and the perception this gives out to the public. 

The collapse of the Lehman Brothers

"You wanna call it a game? This is the game!"

Much like watching the film Margin Call, the Lehman Brothers gave me further insight into the breakdown of a large company, and what really goes on 'behind the scenes'. All the panicking, crisis talks and tough negotiations, it's easy to forget that all of this happened over the course of just a few days. Admittedly, I doubt anyone got any sleep that weekend.

What became very apparent to me throughout the course of the documentary was just have arrogant and almost clueless all the top bankers seemed to be on the situation. Or just how none of them really knew how to handle the situation. It seemed that they had created a very egotistical environment amongst themselves, which eventually became too big for any of them to handle, causing a huge downfall, of which effects were felt all around the world. During a phone call between Paulson and Fuld, Paulson remarks that "the laws for this weekend haven't even been written yet, nobody knows what to do". Yes, at that current moment they are discussing the inevitable demise of the largest Wall Street bank, but I can't help thinking that maybe this is meant more as a general comment. Nobody does know what to do in this situation, but maybe he is trying to suggest that none of them really seem to know what they are doing in their jobs. Arguably, if they did, maybe they wouldn't have ended up in this mess!

There is also an underlying sense of arrogance running throughout the film. That the bank thinks that are too big to fail. Too powerful. The look of pure shock on their faces when the Fed tells them there is no public money to bail them out is a key example of this. The fact that they just assumed that the people would come to their defence and give them a bailout really shows how egotistical this bank was. Maybe they should have been more concerned about how this would affect their shareholders, rather than nursing their bruised egos. Maybe that is why the Fed let the Lehman Brothers collapse. To show that they aren't too big to fail, and to use this as an example to the others banks. It is clear that reckless behaviour, especially with this kind of money, and only being concerned about yourself, really isn't sustainable in the finance world.

Now, I want to discuss this whole idea of SpinCo, setting up a 'bad bank' in which to transfer all the toxic assets. Just how naive do they think the world is?! Basically, they would be moving the issue from Lehman's balance sheet, on that that of another. Whilst this may seem like a nice tactic at first, getting rid of the assets and being 'free' of them, surely this would be an indicator that something has, or is about to, go awfully wrong? This wouldn't be something that even the most confident investor couldn't just brush over. 

Unfortunately, the finance world seems to be very interdependent, however many banks fail to see or believe this. They are far too concerned with securing the lowest cost of capital for themselves and linking companies and investors, that the financial crisis was bound to happen. They are too busy looking after number 1 and unwilling to help each other out, however maybe if, for once, the banks had worked together, the crash may not have been so overwhelming for everyone.

The film ends with a quote from Bernie Madoff, or "the greatest con artist of all time" as he is commonly known. That "everyone wants something for nothing; you just give them nothing for something". I think this summarises the whole crisis pretty well. Everyone was out looking after themselves, and expecting people to come and help them, when really nobody was willing to do something that wouldn't benefit them.