To an unfettered capitalist, market forces must reign supreme. A business, and therefore its senior leadership must be free to act in what they perceive to be the company’s (and frequently their own) best interests with minimal interference from the state. However, the public perception of the reasons behind the Global Financial Crisis is that it’s down to rampant business greed and fat-cat executives whose only interest is to line their own pockets.
The European Commission is seeking to give powers to shareholders of publically traded companies within Europe to control executive pay and more influence within the firms they invest in. Well, clearly this is doomed to failure since it would vest such control in the hands of majority shareholders which invariably are institutional investors.
A spokesman for the EC said: "Today, there is an insufficient link between management pay and performance and this encourages harmful short-term tendencies". The initiative is the most recent in a series designed to curb bankers’ bonuses and influence the pay of Hedge Fund managers and other investment vehicles running within the EU
The latest initiative seeks to force companies to provide: "clear, comparable and comprehensive information on their remuneration policies and how they were put into practice". Companies would be expected to state maximum levels for executive pay and explain how the pay policy contributed to the company’s sustainability and long-term interests. This statement would need to show that the pay and conditions of non-executive staff were considered when setting executive pay and specify the ration between average pay and executive pay within the firm. The Commission hopes that their proposal will boost shareholder awareness and oversight; cynics would say that this was no business of the Commission and that investors should be responsible for their own due diligence.
Curiously enough, the Swiss recently held a referendum on fixing a ratio between executive pay and the lowest worker’s salary of 12:1 which did not pass.
Given the reluctance of the British government to allow the EC to insist on capping bankers’ pay within the UK, for fear of triggering an exodus of financial firms from the City and similar feelings elsewhere within the EU, it seems unlikely that much will come of this initative.
Matthew Fell of the Confederation of British Industry summed up the position rather well: "We welcome the European Commission's objective to encourage more long-term focused shareholder engagement. However, any changes to the rights and responsibilities of shareholders should not blur their roles with those of company boards and management; otherwise they will result in inefficient micro-management by shareholders. It shouldn't be shareholders' responsibility to set specific pay levels or vote on pay ratios, for example. It's right that shareholders focus on the big picture when it comes to pay, and in the UK they have a vote on company pay policy, but the remuneration committee should retain responsibility for specific pay levels."
In other words, market forces must be allowed to set executive pay or the best people may vote with their feet and head to less restrictive jurisdictions.