City fund manager Hermes calls for crackdown on bosses pay

City fund manager Hermes has called for a complete overhaul in the way CEO pay is set.

The investor, which oversees £28.6bn, thinks it’s time to address the question of fairness, amid a rising tide of public anger that is making itself felt (and not in a good way) in Britain’s politics.

Hermes identifies five problems with current awards. The first is that they are excessive and unfair and as a result cause resentment (no kidding). The second is that they aren’t terribly helpful to investors. Executive pay packages aren’t aligned with the goal of creating long term value for shareholders and they consistently fail to demonstrate that there is any real link to corporate performance (four out of five companies pay target levels of bonus every year regardless).

The third is that they are excessive complex (again, no kidding, just turn to the remuneration section of any annual report). The fourth is that there isn’t much accountability imposed upon the committees that set pay. Hermes doesn’t say so, but investors are at least partly to blame for that. Despite shareholders being given binding votes on pay policy, and a string of revolts at blue chip companies including BP, WPP, Anglo American and Shire, this year, big fund managers don't say no as often as they should. If they did would pay have been allowed to double in the space of ten years?

Finally, Hermes says investors don’t much trust pay committees. Although see above when it comes to their voting behaviour.

Happily Hermes goes beyond identifying problems. It has some solutions, and some of them are worth considering.

It wants to see caps on CEO pay and much simpler bonus packages. Hermes says there should be just one share based incentive package, rather than a multitude of them, and pay committees should be more willing to cut bonuses if companies under perform. It also wants firms to publish a ratio of the CEO’s pay when compared to that of the wider workforce.

The chair of the company it feels, should even have to write to the workforce to explain the boss’s pay award.

That one is doomed to failure. Remuneration committees already have to write to shareholders, and those letters tend to be full of pompous self justification. Why should a letter to the workforce be any different?

Moreover, what Hermes doesn’t do is suggest any solutions to the problem of its peers failing to exercise their votes (Hermes is one of the better institutions that actually makes use of its franchise).

That said, it’s still a good start and corporate Britain would do well to take notice.

No less a figure than Prime Minister Theresa May has called for a crackdown on bosses pay, amid a rising tide of anger.

One of the causes of the vote in favour Brexit, which she has determined that she will implement, was a desire among a large section of the public to deliver a kick in a painful place to what it perceives as a distant and self satisfied and self serving elite that is out of touch with the problems facing large parts of the country.

In pledging to crackdown on some of the grotesque awards enjoyed by distant, self satisfied and self serving CEOs she might hope to win the support of some of those people.

However, her inbox is overflowing. As such corporate Britain has an opportunity to find its own solution to the problem before the Government moves to tackle it.

The clock is ticking though, and given the corporate elite's tin ear to a succession of controversies over bosses pay, I’m not sure the leaders of coprorate Britain will pay any more mind to Hermes’ well intentioned intervention than they have to previous attempts to find a solution to what too many don’t even see as a problem.