Tuesday, 6 September 2011

There may be trouble ahead

As the FTSE continues its merry plummet and shareholders and pensioners alike look at their investments draining away, and as average wage rises among workers struggle to get anywhere near the inflation target levels let alone the actual rate of inflation, spare a thought for the company directors of these companies.

As Corporate profits fail to impress and futures look very uncertain, there has been an average rise in bonuses across FTSE 250 companies of 187% over the last 10 years while the average long term incentive scheme has risen 700%.

Some would argue that too much of the profits are being creamed off by directors but this is not a new phenomenon. I would argue that there has certainly been a growth in the wealth of 'Portfolio' non-executive directors who just put their names to companies, do the odd lunch and collect fat checks and nice equity plans. Shareholders and pension plan holders like most of us may rightly ask, 'What the hell is going on?' as it is unclear what value we are all getting for such increases in bonuses. But it seems to be the vogue and glib line that. 'If you don't pay the big bucks then you don't get the talent'.

For those of us in business, this is tosh. There are a handful of executives out there who seem to have the knack of turning under performing situations into vast growth in wealth, usually by leveraging someone else's money. Private Equity are the drivers here but that has nothing to do with general purpose company running. The average across the FTSE 250 companies show that profit growth is nothing like the growth in bonuses. And people earn them, as we all know.

Picking on the banking sector, the share price performance over the last 10 years has been pitiful but the incredible bonuses paid have been mindblowing. At the end of the cycle the whole thing went pop and banks literally survived only by our unwilling cooperation by pledging our tax money for the future. This might be allowable if it was a one off situation but the whole thing has been primed to go the same way again. Nobody seemed to realise that the underlying problem was debt and how we trade it. We are finding out that Gordon Brown, that Mensa genius, had no idea either.

But it isn't just banks, even if they are the most idiotic of the culprits after the financial crisis pleaded for a total reform of their modus operandi. Regular companies are at it too. Shareholders should certainly be concerned - but what of the employees?

Surveys about a year ago showed that the average salaries amongst bosses now exceeded the average of their general staff by 10 times in the UK while in the US it's closer 20 times. That is an unsustainable and dangerous gap. There is no such gap in talent and capability and it could be argued that the average value to the company is much more even. But it's dangerous as it seems bosses are immune to the market vagaries and performance. In fact, the worse a company does, the more it will pay its bosses for failure or to get new ones in.

What message does that send staff? What message does it send shareholders? It's incompetence on a growth curve. In too many situations whether a company director or in sport management, it pays to fail spectacularly and quickly. For that you get heaps of money in severance, far more than you could earn in bonuses over the long term for success and you get to do it all over again. It seems the more you fail, the more people will pay you.

It's a cycle we need to break. I don't think general staff will sit about too much longer bearing the brunt of failure with their jobs and wages while fat bosses earn massive bonuses for mediocre performance and failure.We learned very little at all from the financial crisis and it papered over a mentality in company boardrooms that is distinctly unhealthy in modern business.

What happened to only getting paid commensurately for success? Seems to have gone out with the bail outs.

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