Getting a grip on chief executives

In an argument of on Radio Five Live the other day debating the astronomical salaries and bonuses that Chief executives are given these days by large firms, Chris Philp, the Tory MP for Croydon South who sits on the House of Commons Treasury Select Committee was saying that something must be done to give shareholders of a firm a much better say.
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Ben Southwood, an economist at the Adam Smith Institute, said that these payments are perfectly acceptable. After all, shareholders are free to sell their shares in such a firm — which he calls a “bad” firm — and buys shares in what he considers to be a “good” firm — where they don ‘t pay high salaries and bonuses.  Shareholders choose remuneration committees and they wouldn’t choose one which allowed excessive payments.

But Ben Southwood’s argument is invalid because by far the most shareholders these days are not individuals but large institutions, such as pension funds, hedge funds and insurance funds. They will be fully aware that salaries and bonuses to the top executive layers of a firm are often outrageous, but as they themselves are also involved in the various rings of remuneration committees then they’re very happy for the custom to continue.

The point about shareholders selling shares in a “bad” firm in order to buy shares in a “good” firm is a red herring.  The large institutions will be doing this anyway. The excessive payments that may be paid to top executives — even in the good firm they may be buying into — are chicken feed compared with the profits that the good firm is making.

Chris Pilp’s argument, although on the side of the angels, is totally impractical for much the same reason as the shareholding structure mentioned above.  Individual shareholders are heavily outnumbered by institutional shareholders and only very rarely make their voices heard, never mind being able to successfully vote that way.

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