Is Curbing Executive Pay the Right Thing to do?

Vince Cable is in his element. He has the sort of face that seems to say he has it in for someone and he has. In his line of fire are the executives of public owned companies and he is proposing to curb their pay. His reasoning is that over the last few years the combined performance of the top companies in Britain in terms of share price has been static at best while in that period executive pay has risen 13% each year, every year. He has a point.

Or has he? After all these companies have survived a recession, haven't they? And we should be glad of that. Besides, the incentive schemes that executives may be on could be bottom line related and we all know that share price has not always reflected the actual performance of companies in terms of profit making but is more a barometer of the market generally - perhaps more exactly, the sentiment of a select few traders of shares in the world and dastardly computer systems.

It also belittles how a company may be managed in terms of its performance measures. After all, some companies may be going through a transition and require large investment and less profit for a while, others may actually measure profit per head which may increase despite overall profits decreasing. Key Performance Indicators may vary from company to company depending on market conditions and just looking at share price is a very narrow way of assessing the overall success or lack of it for companies. But Vince Cable does have a point.

We have seen spectacular pay offs for executives who fail rapidly and monumentally - take Fred Goodwin for one. But it is becoming the norm. The faster and more effectively you fail, the more you can get in terms of a severance package - so why succeed? This is something most of us find abhorrent in modern day business.

It would seem the way forward being proposed is to reward long term share performance and to let shareholders have some kind of binding say in the matter. That's not always practicable. After all, the significant shareholders in companies may be pension funds managed by well-off mangers who actually only look at a short window of up to 5 years maximum. Why would these significant shareholders vote against a pay award if there are not in for the long run? It may be fanciful to believe that small shareholders can actually club together and organise a revolt that's binding as there may be thousands of individuals to organise.

And what happens when the markets recover? Business will boom and everyone will want the most hung-ho, highly rewarded executive no matter what. Worrying about exact pay now is only a symptom of the austere times we are in. When Britain's back on its legs, no one will worry how filthy rich an executive gets so long as we are all earning something. Isn't that right?

Anyway, lets' get to the nub of this matter. What we are all unhappy about is not so much executive pay but the pay of a thin wedge of incredibly well paid people in the finance sector. In truth, the finance sector only accounts for around 9% of our GDP, yet there is a disproportionate amount of money earned by specific staff within that sector, nearly all working in the City. These are the people who over the last 15 years have hardly increased share price, netted out the profits of their companies to zero at best and in many cases drove their companies to the brink of oblivion. Yet in that same period they earned on average around £3m each and it is rising this year to around £4m each.

Let's face it, these are the people who have made sure that we have extra tax to pay for the next 30 years. Even as we speak, the CEO of RBS, Stephen Hester, will receive a substantial bonus even though the value of our 83% holding in the company is still showing over a 40% loss.

These companies and their high earning staff remain untouchable. They are supposedly regulated by the FSA whose own staff actually received bonuses as they presided over the implosion of the British banking system and their response was to pick on the array of Independent Financial Advisers and drive most of them out of business while bank executives named their salaries and bonuses despite owing us a fortune.

No, Vince, you are looking in the wrong direction. Focus on what's really wrong first before hacking at the general melee of executives. There is a specific, massive problem that affects each and every one of us because we underwrite their failure. We have skin in the game. Our call is to pick on bank traders and executives first - curb the way they earn, how they earn, what its paid for and what they can trade. Then pick on the other guys who also do need curbing too.

The price of failure in banking is always laid upon the general retail banking staff and the taxpayer. And failure wins bonuses. With logic like that, banks should be the first port of call.

All Mouth And No Trousers

Cast your minds back to January this year and we got lots of big talk from the aptly named Department of Business of how it had introduced a scheme to support the car industry pledging up to £2.3bn in cash for loans.

This week we have heard that despite the bravado and big talk, not a single penny of that money has been given to the car industry. There have been plenty of meetings and negotiation, with Jaguar trying to get its hands on around £300m at one stage but for one reason or another, no firm has received any benefit for a scheme that was largely advertised with the sole intention of grabbing the headlines and making it look as though ministers were actually doing something about the potential collapse of an entire business sector on which around 800,000 jobs depended.

The grandly called Automotive Assistance Program (AAP) offered minimum loans of £5m to ailing car firms while the Enterprise Guarantee Scheme (EGS) offered loans of up to £1m - clearly any component or distribution firm in the car industry that wanted a loan anywhere between £1m and £5m was scuppered from the start. But then came the conditions. Far from taking on risky loans as the scheme was intended, with £400m of potential toxic debt write off written into the scheme form the start, firms who applied for the scheme found the rules too inflexible.

The Government, meanwhile, claim that there are 10 firms in negotiation on the scheme needing as much as £2bn of loans or guarantees. It seems that during the period of inertia from the beginning of the year, the scrappage scheme, successfully cloned from the continent, has filled a gap which has helped rescue rapidly falling car sales by offering incentives directly to customers to promote buying new cars - a simple and sensible proposition, easily aimed at the right point. It seems that simple, well directed applications of money get immediate and exciting results whereas complex, airy ideas which are difficult to implement but far more grandiose sounding and headline grabbing get no results whatsoever.

If only the Government had looked at its history in education and health it would have realised that smaller packets of focused money deliver greater results than shed loads poured down a hole with no real objectives and spurious measurements of results.

The Automotive Assistance Scheme has been an object lesson in how to waste time and money and get zero results but good headlines. It also illustrates that spin gets the desired results as everyone will see car sales recovering and believe it was the AAP that helped. Instead it was a continental idea that had already brought spectacular results in France and Germany - both of whose economies were out of recession at the end of the Summer.

IT seems that inaction speaks louder than words.

Another fine fiasco has been the trade credit top up scheme, designed to help small companies where their credit insurance has been lowered or withdrawn. The Department of Business, once again, offered £5bn in another headline grabbing initiative which was said to help companies maintain trade with one another. It is a testament to the fortitude and invention of treasury departments that just 72 UK businesses have benefited from the scheme utilising just £18m of the £5bn funds (less than 4% of the total).

Now Lord Mandelson has said that he will withdraw the scheme as it was no longer required, which has sparked uproar among small to medium sized business owners. The issue is that during the recession, businesses have focused on cutting their cloth and recognising more profitable business opportunities where credit is easier to cover. Now that we are entering the recovery phase, businesses will be gearing up to get a little more creative and risk-taking as markets pick up speed.

Once again, companies have felt that the scheme was too inflexible, restrictive and prohibitively costly to use. However, rather like the AAP and the EGS, great sounding, ostentatious schemes have delivered nothing to British business and it is little wonder that when so much was given so cheaply to banks and so little and expensively to business generally that the recession has lasted far longer in the UK than anywhere else. Grand ideas with little substance packaged with large business in mind always.

Too much money given to too few too cheaply, and too little to many too expensively equalling a long recession. It's a lesson in mathematics and economics that I hope Mandelson remembers in future.

Coffee But No Danish, Please

We all need our top customers and big companies have a great advantage as they are safer clients to have. But sometimes big customers can be your worst nightmare.

We have all had our troubles during the last year and collecting cash always gets that little tougher in harder business times. Everyone wants to hang on to their cash as long as possible but you have to be reasonable about it as what you do to others can be done to you.

You may be disturbed to read that the Danish brewing giant, Carlsberg (yes the one with the natty adverts about 'probably the best lager...'), has unilaterally increased its standard payments terms to 95 days. To boot, that is 95 days from the end of the month of the date of the invoice which can be up to 120 days.

So if you are a small business and you supply Carlsberg some products or services, what do you do? Apparently you put up or get lost, according to the company's new terms and conditions. They have said that they may negotiate based on a commercial advantage in some cases but their basic premise is that these are their terms - you either want to be a supplier or not.

Now I dare say that their largest suppliers, which may be large companies in their own right, may have the ability to stare them down on this but if you are a small or medium sized business local to their brewery in Northampton, I am sure you will be presented with this appalling dilemma. Either agree to the terms or kiss goodbye your customer.

Imagine if you supply recruitment services to the company - no matter how good a job you have done, you do not get paid for up to 120 days after a candidate is chosen and starts. This will be on top of the time it has taken to actually research and find candidates which itself could be a matter of a few months - it could be as much as 6 months between job brief and payment.

Absurd as this may sound, this is potentially a landmark case as if this is allowed to be imposed on suppliers, it effectively gives carte blanche to other companies. Carlsberg is not alone, Diageo also extended its mandatory terms to 60 days earlier this year. If this is a trend in business, then small businesses could get squeezed to death as banks are never willing to fund businesses with a poor cashflow model as they are effectively just paying for salaries.

We could argue that selling drinks is a pretty fast-moving, cash generative business but there are considerable core costs within brewing which do tie up money. But still it is very hard to argue why a business like Carlsberg, doing pretty nicely in the midst of a recession, needs to strangle suppliers in such a draconian way. Just imagine if the Carlsberg customers started to mandate onerous terms.

That's the way of the world in business to business (B2B) suppliers. For most small and medium B2B suppliers there are few, if any, cash payers - everything is done on credit. For many of us, our own suppliers either do not give much credit, demand cash or credit card and the maximum we can hang onto our own cash is around 45 days and if we are very tricky about it, 60 days. Realistically, if we don't pay within 30 days then we are only asking to get treated more harshly in the future and particularly when we need things urgently or need to go over our limit for a large purchase to satisfy a large customer. In other words, small businesses do not get a great deal of choice, they are squeezed by both customers and suppliers and, frankly, they have little choice but to get on and lump it. Either that or they have to cut their nose off to spite their face by deliberately not trading with large companies.

All that sounds a terrible indictment of modern business, although if you go to Italy, this is pretty much the norm. The fact is, the brave new world that Gordon Brown painted for us seemed to include leaning on big companies and telling them to pay smaller ones faster rather than slower. In fact, he did say that Government would lead by example by settling bills faster. Right now, I am involved in a company whose end users are schools and I can attest that Government bodies in that area pay no faster than they did before. My sister's company which is involved in selling in to Education Authorities, amongst other organisations, can also testify that things have got no better, if not worse as there are far more quibbles, but certainly there is no new zest to pay early as promised.

Banks play their part by continuing to be frugal in terms of credit and ridiculous when it comes to overdrafts to support slow payments. Just recently, I had to pay a supplier and had not transferred the money into my current account in time. For a matter of an hour or so, I incurred a £3,000 overdraft above my agreed limit even though I had had several times that amount in my deposit account. I was charged at 4 percentage points above base and for a whole day. When I approached them last Summer for a short term facility they refused even though I had a large Capital Bond with them due to mature the very next month which covered the amount I needed by a factor of four. The facilities to small businesses are very poor and the whole Government Enterprise Loan Guarantee Scheme seems to have not helped at all from my dealings with other companies.

What Carlsberg are doing is not just bad for business, it is bad for the economy. If other companies start to unilaterally dictate onerous terms, then small businesses will be driven to wall. In these hard times, small businesses need all the help they can get and if they offer valuable services and products they should not be discriminated against simply because they don't have enough muscle to fight back.

The Business Secretary and PM talk a great story about how they help small businesses; this is a specific and practical example of how they can help. They can enforce Carlsberg to offer consistent and fair terms to all its suppliers, regardless of the amount of business they do with each. If the Government fails to act, we will get a free for all.

It is time to forget about and stop pandering to the super-rich and get down and help the backbone of this country - small businesses.

Credit Where It's Due

One of the biggest problems facing small businesses is the promise of getting paid. Even successful firms are having difficulties agreeing sufficient credit limits to get sustained growth. This is due to the fact that credit insurers are reining back their offerings.

One of the best ways to mitigate risk in business is to buy credit insurance on debts. This means that if I deal with a customer and they want to have a credit account to purchase from me, then I can buy insurance to cover that credit limit. The insurer will use credit rating data like Dun & Bradstreet and Experian to assess the risk itself, and then offer to insure an amount of that credit limit which means that should my customer go bust or not pay for another reason, the insurer pays the amount owed to me. If I choose to allow the customer to go above the credit limit agreed with the insurer, then the extra risk is all mine and it may even risk the insurance of the original agreed amount as it was a decision taken solely by me to increase the exposure.

Now credit insurers are getting much tougher as credit rating agencies are also assessing companies' net worth and credit history far harder. For those companies who do not have a decent balance sheet, good cashflow or good credit history, agencies are slashing ratings and this means that credit insurers are decreasing the levels of cover offered. Credit lines are shrinking fast and this means that even if we want to expand our sales, often the confidence is not shared by credit insurers and this limits opportunities to sell more.

This is really at the heart of the small business engine and while the Government focuses on credit into the mortgage market to kick start the economy, it is the confidence to trade amongst ourselves as businesses in the UK which is a far bigger problem. While we get much harping about global international trade and protectionism, the reality of the credit crunch and recession is much closer to home for most businesses.

Credit Initiatives

We have heard before that there has been the Enterprise Loan Guarantee Scheme which allows banks to offer loans with up to 75% of them guaranteed by the Government and how this is being abused by the banks to not offer new loans but cover existing debt. That was a poorly implemented scheme from the Dept. of the Business Secretary. The next move from this department is aimed at credit risk between businesses.

The British Chamber of Commerce (BCC) has been lobbying on behalf of SME companies for such a move as it is limiting companies' ability to survive let alone thrive in this economic crisis. The good news is that the Government is expected to announce in the forthcoming budget some measures to help remedy this. On a similar scheme offered to banks, it is envisaged that the Government will underwrite part of the credit risk for bad debt and allow credit insurance companies to be more liberal with their assessments and support.

Already though, many small businesses have pushed back as in order to qualify for this support there are tomes of forms to fill in and data to acquire which is firstly beyond the reach of most small companies and, secondly, an onerous burden of administration on them which they typically cannot afford the time to do. It seems the scheme is doomed from the start as it is once again geared toward larger companies that have the in-house resource or money to fund such vast increases in the administrative load.

Credit Where It's Due

The real issue that could arise is similar to the Enterprise Loan Guarantee scheme where banks have basically gone to existing customers, offered a small increase in current loans and then converted them to Government backed lending. It means little NEW credit facilities are being given but more of the old facilities are now heavily guaranteed by the Government, I mean, taxpayer. The credit insurance business could go exactly the same way if this is introduced in a similar manner. Far from increasing available credit, the credit insurers will simply pass more of the existing book of risk onto the Government and not increase credit limits much at all.

Let's hope we get credit where it's due.

Putting Your Money Where Your Mouth Is

In the month of the year, March, when the car industry usually sells 17.9% of the total annual car sales in the UK, sales dropped by over 30% from the same month last year. There is no point making cars if you can't sell them and so this was about the worst possible news for the car industry - even these figures were around 5% worse than expected.

The Government will troop out the excuse that this is symptomatic of a global slump caused by the recession. That is not entirely true.

In Germany, there was a corresponding 40% increase in sales while in France it was nearly 10% up. So what is the difference between these countries and the UK?

Bail Out, Schmail Out

Business Secretary, Lord Mandelson, announced a £2.3bn bail out for the car industry back in January. By March, companies were already moth-balling production lines, putting workers on less hours and there were talks of widescale redundancies. For some peculiar reason, the bail out was stalled, according to Mandelson, in negotiations with the Bank of England and The Treasury, presumably after he had washed his hands of it.

It is very vogue to talk of big numbers as they impress everyone and by mentioning them it seems the problems, or at least the public scrutiny of them, will go away. However, as I have blogged of late, it is all very well conjuring up these ideas with vast sums of money but it is all about how each penny is spent - that will determine how effective these plans are.

In this instance, a cursory glance would suggest that both Germany and France have gone to the very heart of the problem. Instead of trying to preserve production or help tiding car makers over, Germany and France have gone directly to the consumer and given a direct incentive - a scrappage deal. This, coupled with aggressive offers from the dealer network and vendor in unison, good credit deals and plenty of direct advertising appeal, has effectively dispelled the consumer gloom and not only kept sales going but, of course, kept production going.

Instead of pointing fingers at others, these countries sought to directly solve the problems with deals that they can account for every penny for to the taxpayer. The British Government response to such a deal was that they a were not sure it was the best value for money.

Cutting Through The Bull

The UK response to the car industry plight has been to not just dither but grind to a halt - blaming other factors and saying it's a global slump issue. Germany and France saw no such obstacles and issues - they addressed the problem with a carefully calculated plan that was instantly executed and the result was spectacular.

In contrast, we look at the bank bail outs which seem to grow daily by small or large billion amounts and we have no idea how the money is being spent or whether it is working or not. Interestingly, it was both France and Germany who balked at the US and UK lavish bail out plans and managed to curb the senseless, ever increasing bail out funds being lobbed down a financial drain.

I have no idea whether these two countries are right but there does seem to be a stark contrast between the British approach and theirs. Time will tell but each day the clock is ticking for the British car industry - I have a suspicion that if it does take a beating in the next year as the recession really grips due to lack of constructive action, then it will never recover to the same levels again in this country. There is simply too much competition elsewhere for the work and we own none of it to influence it.

That will be right at the doorstep of the Business Secretary, in my opinion.