Executive Pay and Responsibility: Where the Buck Stops

Posted on February 1, 2012


The recent debate over the bonus of the Royal Bank of Scotland (RBS) Chief Executive, Stephen Hester, has reached its all-but-inevitable conclusion. He has decided it would be inappropriate in the present climate to accept it. Two arguments were made against his receiving a bonus. Firstly, it was argued that in a bank effectively owned by the taxpayer such a bonus would have been inappropriate in current circumstances. Secondly, it was argued that the halving of the RBS share price over the course of the year suggested a performance unworthy of reward. The latter invites comment upon a ‘bonus culture’ that has developed within business, and more specifically within the financial sector, in recent years.

Focusing upon the case of Stephen Hester, it is only fair to note that his contract, agreed by our previous government in 2008, set out terms of remuneration. If RBS shares had increased in value over the last year Mr. Hester’s bonus entitlement would have been double that which has been under attack. It would have been paid in shares and not as cash. The package, compared with those that others in similar posts have been awarded, is relatively modest. A bonus is supposed to reflect institutional performance. When paid in shares the individual should have an enhanced interest in medium to long term performance. If the bank had been run on unsustainable lines, as it had been by Mr. Hester’s predecessor, his own remuneration package would have diminished.

It is not the job of Parliament to decide Executive pay.

This is surely a responsible way of rewarding performance. It does, nonetheless, seem that current expectations within City institutions of all-but-guaranteed yearly bonuses is unhealthy. If they cease to reward truly good performances they amount in effect to salary supplements.The long-term success and sustainability of the economy is better assured when bonuses act as genuine rewards for prudent business practice.

The more important point raised by the recent cause celèbre concerns remuneration of senior executives as compared with ‘average’ employees. According to the Economic Policy Institute those defined as executives earn on average two-hundred-and-forty- three times more than the average worker. This figure may sound high but is lower than ten years ago, when it was two-hundred-and-ninety-nine times more. Such differentials have traditionally been justified on grounds like those of qualification and responsibility.

However, questions are increasingly being asked about fairness in pay differentials. The qualifications and responsibility demanded in high-earning positions are in most cases little different from those of the 1960s, when the estimated US pay-gap was a ‘mere’ twenty-four times the average wage. It is argued that the much-increased disparity will further fracture the fabric of society, with a small group of individuals utterly disconnected to the other. Envy and hatred of the ‘rich’ may increase. Such circumstances, it is argued, are not beneficial to social harmony or stability. There are those, like Andrew Simms of the Guardian who propose salary capping.  There are, however, reasons why this is not a good or practical policy to pursue.

The arguments we hear about capping amounting to a disincentive to hard work, innovation and ambition are similar to those made against high tax rates for big earners. There is some validity in such arguments. The key difficulty is that it would be for government to implement arbitrary limits in the face of widely differing views. It is rather easier to reach consensus about the minimum required to sustain a decent standard of living. In a democracy governments inevitably pander to popular opinion. Except perhaps in periods of great general prosperity it would generally be a populist move to lower the level at which the the cap is set on high salaries. Governmental capping of remuneration would result not in sensibly maintained limits but in sums subject to the vicissitudes of popular opinion and perceived political advantage.

All-too-often government legislation has led to a diminution of a sense of responsibility in the population at large. Highly paid individuals do not often attempt adequately to justify their remuneration, and that is a neglect of responsibility on their part. It is not surprising that the highly paid are increasingly under attack in the media and by politicians. Nor is it surprising that there is a sense of malaise about all this in the population at large. If prominent bankers and businessmen were seriously to attempt reasonable and reflective defences of their salaries, they might perhaps in present circumstances argue themselves into settling for less. Recently the Chairman of RBS, Sir Philip Hampton, has taken such action in refusing an offered shares reward on the basis that it was ‘inappropriate’. There is such a thing as social responsibility, and it ought to be taken into account by reflective individuals in justifying their behaviour in public. The present government has re-emphasised the responsibility of persons towards society and the communities within which they live. It would be sensible if it were also to bring its weight to bear in stressing the social responsibility element in the just salary.