Less really means less: Why curbs on executive pay aren’t good for any of us

When Stephen Hester, the CEO of the Royal Bank of Scotland (RBS), decided to turn down his £963,000 bonus, Labour’s leader Ed Miliband claimed a victory for his tactics, while Prime Minister David Cameron and team heaved a sigh of relief that this particular bonus award would fall out of the headlines.

In some ways Hester’s decision was not a big surprise. Since the news broke that Hester had been granted almost a million pound bonus by his board various people jumped on the bandwagon to make it plain that they thought Hester should not have it.  During BBC television’s Question Time last week (26 January) Jeremy Browne, the Liberal Democrat Minister at the Foreign Office, argued that it was a ‘matter of honour’ that Hester should reject it, explaining his view that Hester was really a ‘public servant’ given that the government owned 82% of RBS. Boris Johnson, the Mayor of London, called on the government to step in and take action.

On 27 January the BBC reported that more than 90,000 people had signed a petition calling on the government to stop large bonuses being paid to RBS bosses. A poll conducted by the Guardian on the same day on the question ‘Should Hester return his bonus?’ revealed that ‘out of 6701 people who voted … 79.2% said Yes and 20.8% said No’, a four to one majority against Hester acceptingit.

Even Mervyn King, the Bank of England Governor, joined in. He appealed to Hester’s and his colleagues’ consciences last week, pointing out if only the tiny elite are rewarded, public confidence in the entire market system is lost: ‘Those taking decisions on remuneration, in the financial sector and elsewhere, need to understand that a market economy rests not just on incentives, but on the acceptance that the distribution of rewards is fair’. The Unite union was even blunter when it described the bonus offered to Hester as ‘disgusting and offensive to every working person in the country’.

So even though the government (albeit abandoned by some Liberal Democrats and Boris) defended Hester’s right to a bonus on the basis that he has turned RBS round back to profitability and that any greater restraint to bonuses than had already been accepted could prompt a speedy exit by Hester and his board, it was transparent that they still hoped he would decline the bonus offered. Is the outcome of this whole affair something we should really be applauding? I think not.

The hue and cry over high salaries and huge bonuses for executives that got going before the Hester affair has already sparked a big debate in the wider Human Resources (HR) world. Will Hutton, CEO of the Work Foundation,wants to ensure that executives should be required to put some of their base pay at risk if they want capitalist-type returns (known as earnback). Two professors from the Warwick Business School, Bruno Frey and Margit Osterloh argue in this month’s Harvard Business Review that companies should stop tying pay to performance as it simply does not work. They make the point that we are living in a fast changing economy and that it is impossible to determine tasks in the future that can measure performance. They argue that not everyone is into material gain and if anything performance pay undermines intrinsic motivation and holds back innovation.

Business Secretary Vince Cable has recently outlined measures for limiting executive pay in general. He wants to boost shareholder power and demystify complex pay deals. He has proposed legally binding votes for shareholders on boardroom pay policy.

There seems to be a broad consensus then that hefty pay rises and bonuses are a problem for us all. According to The Guardian, just 7 per cent of more than 2,000 people questioned by pollsters ICM, thought that top executives should earn more than £1m, including bonuses and pension contributions. Only 1 per cent thought they should earn more than £4m, the average level for FTSE100 bosses. Deborah Hargreaves, the Centre’s chair, said, ‘Our polling shows the public do not believe executives, even of the biggest companies, should be awarded multi-million pound pay packages. It is time for boardrooms to wake up to what is fair and act now to rebuild public trust.’

You could almost say that we are experiencing a Diana moment. When the Princess of Wales died in that car accident, the nation appeared united in grief. Today it seems to be united in anger and distaste for anyone with loads of money in their pockets. For once the politicians appear to be (almost) at one with the people. The problem is that none of this focus on executive pay will help us get to the roots of today’s crisis. It certainly won’t help us to recover from the economic doldrums. If anything this debate and the current consensus is worse than being a distraction; it implies that our difficulties could be overcome with a bit more fairness when what we really need is for tough action to make Britain’seconomy much more productive.

It is being argued by the critics of executive remuneration that the problem with capitalismis that it is not moral or responsible enough. At the last Labour Party Conference in the autumn, Miliband talked about ‘predators’ and the need for responsible capitalism. Cameron has echoed this sentiment with his call for ‘moral capitalism’. Nick Clegg, his deputy Prime Minister, wants companies to adopt a ‘John Lewis economy’ – a ‘fairer’ business model – where employees have a direct stake in the running of the company they work for. While Cameron calls for ‘less but better regulation’, Miliband says ‘it is not a question of having few or more rules, it is about the right rules’. They both seem to agree that with regulation of some form capitalism can be made more moral and responsible.

This sentiment is at one with the earlier critique that the root of the financial and economic crisis in the West is an ‘excess of capitalism’. This time the focus is on excessive pay at the top – the next person to be criticised will probably be Bob Diamond, the CEO of Barclays. But anything that is seen as excesses of capitalism has been under attack. We are told that too much borrowing and spending is an issue, we should save more. We are told that the market has been allowed to get away with too much freedom and hence it needs more regulation. The argument is that curbing these excesses, making capitalism more responsible and caring, will make capitalism more stable and less prone to crisis.

The problem though is the opposite. It is not that we’ve had too much irresponsible and unfair capitalism that needs its excesses curbed, but in reality we need more of what capitalism is supposed to be good at. We need more ideas and more innovation that can kick-start the creation of a revitalised productive economy. We need more wealth produced so that as a nation we can enjoy both more investment in the future and a higher living standard. Cameron and the Opposition’s time will be much better spent if they stopped trying to focus on the narrow aspects of bonuses and pay and instead focused on the mega questions of how we can grow more wealth today.

Growth is not going to come out of restrictions imposed on the top earners.Politicians may want to ensure the message ‘we are all in this together’ is the one we take to heart but sharing the pain of the austerity measures is not going bring about economic growth.

But then, can they really work out how to bring about economic growth? Cameron has suggested that we should focus not on gross domestic product (GDP) but on general well-being (GWB); recently he ordered the Office of National Statistics to investigate the possibility of a national index for happiness. The reasoning behind this should not be missed. The example of Bhutan is always given – where apparently everyone is happy and where gross national happiness is the official guide to policy – yet Bhutan is one of the smallest and least developed countries in the world. I am guessing that very few people really want to live in a poor country like Bhutan. But with all this argument for a levelling down of incomes, we won’t become more productive butinstead are in danger of stagnating further and our living standards dropping further. Unfortunately giving up the focus on GDP moves us in that direction.

Hester’s decision may be pleasing to the political elite and other commentators but the ‘fairness’ everyone craves for simply means sharing the cake as it is, and not working out how to grow the cake ten-fold. If we allow this approach to carry on, it won’t be long before we join Bhutan.

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