Here’s a finding that sounds correct even before you’ve read the survey: high pay for chief executives demotivates the rest of the workforce, and staff work less hard if they think the boss is creaming off an unfair share of the spoils.
The supporting research comes from the Chartered Institute of Personnel and Development (CIPD). Almost six in 10 employees said the high level of chief executive pay in the UK demotivated them. Only 8% said such rewards at the top inspired staff to work hard.
What else would you expect? As Stefan Stern, head of the High Pay Centre, puts it: “Outlandish pay sustains the myth that a single, heroic individual is somehow running a big business on his or her own. That’s simply untrue.” Yes, and the employees know it is untrue.
The CIPD, calling for a rethink in chief executives’ complex pay packages, says a crisis point has been reached. Indeed, even some of the recipients of these packages struggle to see the logic. The new boss of Deutsche Bank said the other week that he didn’t know why he had been offered a contract with a bonus because he wouldn’t work harder or any less hard as a result.
In a rational world, the suppliers of capital – the shareholders – would also be screaming for reform since pay-for-performance, the supposed justification for the surge in executive pay, has failed even within its own narrow terms. Median pay for chief executives in FTSE 100 companies was £1.4m in 2003, £2.4m by 2009 and £3.3m in 2014. Meanwhile, the FTSE 100 index has failed to keep pace: it first reached its current level in 1999.
One or two fund managers – representatives of shareholders and pension fund savers – do concentrate on the size of executive pay packages, as opposed to attempting to fiddle fruitlessly with their design. But shareholder power isn’t having much effect. The coalition government gave shareholders binding votes on boardroom pay but the CIPD is right to say “there is little evidence that the status quo has been disturbed in any meaningful way.”
What should be done? Transparency would be improved if companies – and public-sector organisations – were obliged to publish the ratio between the chief executive’s pay and the average employee’s pay; even the US is going down that path. But one suspects bald statistics alone won’t do much.
Adjusting the line-up of people making pay decisions might. How about putting employee representatives on remuneration committees? Apologists for the current system tend to be outraged by what they regard as dangerous interference in traditional governance arrangements. Boards are meant to be unitary, it is argued, and members of the pay committee should be aware of a company’s overall strategy.
The objections have some force but, after three decades in which executive pay has lost touch with general pay inflation and returns to shareholders, it is reasonable to try something new. Employees on pay committees would “inject a much-needed dose of reality into boardrooms”, says the TUC union’s general secretary, Frances O’Grady. They might. It’s an idea whose time has come.
Too much, too soon for Purplebricks?
We are familiar with ebitda – or earnings before interest, tax, depreciation and amortisation – alternatively known as profits before the nasty stuff. Here’s a new one from Purplebricks: contribution before media costs.
On this basis, the low-fee estate agency did splendidly in the five months to September. Only 18 months after launch, it produced a £314,000 “contribution”. And those media costs? Unfortunately, they were £5.16m, meaning ebitda was a negative £4.85m on revenues of £5.73m.
Those numbers tell us only that that Purplebricks is a young company obliged to spend heavily on advertising – mostly on television – to catch the eyes of people wanting to sell their homes. Its longer-term value may lie in its business model, described as a hybrid between traditional estate agents and an online version.
As argued here previously, Purplebricks looks best placed of the new crew hoping to disrupt the market for the benefit of customers. That assessment holds but was made before Purplebricks disclosed in its float prospectus quite how small its revenues are, and how much it currently contributes to TV companies’ coffers. Good luck to the Purplists, but, from a hard-headed investment perspective, the £240m valuation looks too much, too soon.
AstraZeneca takes a punt on Acerta
On a grander scale, AstraZeneca is paying $4bn for a 55% stake in Acerta Pharma, a US-Dutch company whose main development drug, a potential treatment for blood cancer, has yet to reach the market. If AstraZeneca wants full control, it will end up paying $7bn.
It’s one hell of a punt on an unproven medicine but, by the standards of these things, it may be close to fair value. US company Abbvie paid $21bn this year for Pharmacyclics, whose novel haemotology drug had previously been approved. If Acerta’s rival is merely highly likely to be approved, and if AstraZeneca genuinely thinks it will be “best in class”, then $4bn plus $3bn looks reasonable.
Attractive odds, however, won’t spare chief executive Pascal Soriot’s blushes if his nag crashes at the final regulatory hurdle. That’s life in the big pharma business.
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