Something has gone wrong with bosses'pay. The solution has to lie with shareholders

RUNNING a large public company is a stressful and important job. Thousands of employees and business partners and millions of customers and shareholders rely on the good judgment of corporate chief executives, who have to make decisions in a climate of constant uncertainty. Only the savviest and most determined need apply. Lately, though, these adjectives hardly spring to mind when company bosses are mentioned. For many, top bosses are not the toughest or most talented people in business, just the greediest.

A string of corporate scandals in recent years, from Enron to WorldCom to Tyco, have revealed senior executives apparently plundering their companies with little regard to the interests of shareholders or other employees. And even when no wrongdoing is alleged, huge pay awards are provoking growing outrage. Just ask Richard Grasso, the former chairman of the New York Stock Exchange, who went from folk hero to a symbol of excess almost overnight when it was revealed that he was due to receive $188m in accumulated benefits. (What is now causing the most indignation, in Europe as well as in America, are " golden parachutes" and other payments which reward bosses even when they fail. Not only does it seem that bosses are being fed ever bigger carrots, but also that if the stick is finally applied to their backside, they walk away with yet another sackful of carrots to cushion the blow. Bugs Bunny couldn't ask for more.

The highest-profile cases of excessive pay, unfortunately, are not isolated exceptions. Bosses' pay has moved inexorably upwards, especially in America. In 1980, the average pay for the CEOs of America's biggest companies was about 40 times that of the average production worker. In 1990, it was about 85 times. Now this ratio is thought to be about 400. Profits of big firms fell last year and shares arc still well down on their record high, but the average remuneration of the heads of America's companies rose by over 6%.

This one-way trend in top executives' pay has rightly raised eyebrows, on both sides of the Atlantic. The supply of good bosses may be short, but can it be that short, even during an economic slowdown and stockmarket slump? A recent poll in Britain found that 80% of people believe that top directors are overpaid. This summer customers boycotted a Dutch retailer, Ahold, to express disapproval of the pay awarded to that company's new chief executive.

Unions in America and Britain want governments to be more directly involved in regulating bosses' pay. But that cure threatens to be even worse than the disease itself. It would be much wiser to play to capitalism's strength — its flexibility — and to encourage shareholders themselves, the 'ostensible owners of companies, to sort the problem out. For too long the missing element in the setting of top executives' pay has been the active interest of shareholders. Only once that comes into play can the bargaining between boards and bosses become a more equitable affair.

Lavish pay-outs are not only costly in themselves but can also damage the long-term health of a company. Too many bosses have manipulated corporate results to fill their own pockets.

Moreover, pay packages thought excessive or unfair can destroy morale among the rest of a company's workforce.

So what should shareholders do? For a start, big institutional investors can often make better use of the powers that they already possess. In Britain this year shareholders received the right to vote on top executives' remuneration. And yet at only one company (GlaxoSmithKline) did big investing institutions vote against an existing package - not an impressive performance if they are genuinely aggrieved.

Beyond Lake Wobegon

The pay-setting process is characterised by what has come to be known as the Lake Wobegon effect, after the novel " Lake Wobegon Days" by Garrison Keillor. All Lake Wobegon's children are said to be " above average." Most boards appointing a new chief executive will seek the advice of a pay consultant, who will tell them the going rate. The trouble is, no board wants to pay the average for the job. The above-average candidate which directors have just selected as CEO, they invariably reason, deserves more. And so bosses' pay spirals upwards.

If shareholders want to break this mould they need to be far more diligent. Greater transparency about executives' pay will undoubtedly help, and moves in that direction in both America and Europe are to be welcomed. And yet shareholders must also exercise more say in choosing genuinely independent directors to select and monitor the CEO. Few public companies today in either America or Europe have a majority of independent directors. This week, America's Securities and Exchange Commission took steps in the right direction by proposing an increase in the power of shareholders to nominate and appoint directors. Once they have these powers, shareholders should make use of them.

That leaves the vexed question of how, and how much, to pay top bosses. There can never be any simple, single formula for this. Much will depend on the situation of each company. The boss of a firm in a stable or declining industry should probably not be paid in the same way as one in a fast-growing high-tech market. Some corporate boards ought to at least consider a return to what was once the norm in both America and Europe (and still is in Japan) and largely ditch pay-for-performance and instead pay largely through a straight salary (most lower-level employees are paid this way).

Yet most boards will probably stick with pay-for-performance of some kind. Whether in the form of options, the outright grant of shares, bonuses tied to criteria such as earnings or revenue growth, or some other means, pay should be explicitly aligned with the long-term interests of the owners, not short-term blips in share prices or profits. Whatever formula is chosen, some bosses arc bound to try to manipulate it. This is why, in future, capitalism's pillars, the shareholders who own the company, will have to become more actively involved in choosing the directors who represent them and in policing what they do. Shareholders, after all, supply the carrots.

The Economist

Notes

1.carrot and stick policy - политика кнута и пряника

2.Bugs Bunny - an American cartoon character. He was created in 1940 by Tex Avery for Warner Brothers. Bugs likes carrots, often asks " What's up, Doc? " and always tricks the hunter Elmer Fudd.

Vocabulary

Vocabulary Commentary

В английской экономической литературе при описании вознаграждения сотрудников компании встречаются некоторые профессиональные жаргонные выражения, такие как golden parachute, golden handshake, golden boot tin parachute. Каждое из них в образной форме передает информацию не только о характере вознаграждения, но может содержать указание на определенные события в жизни компании, которые по всей вероятности повлекли такие выплаты.

Golden parachute - букв, «золотой парашют».

Golden handshake - букв, «золотое рукопожатие». Чрезвычайно выгодный контракт, предлагаемый руководящему работнику и предусматривающий предоставление огромной компенсации в случае потери работы в результате поглощения компании.

Golden boot - букв, «золотой сапог». Финансовые и нефинансовые поощрения, предлагаемые пожилому служащему, чтобы вынудить его «добровольно» выйти на пенсию.

Tin parachute - букв, «оловянный парашют». Гарантированный бонус и другие льготы для рядовых сотрудников в случае потери работы в результате слияния.

Golden handcuffs - букв, «золотые наручники». Контракт, связывающий сотрудника и предусматривающий

значительное вознаграждение в том случае, если он остается работать в данной фирме.

Golden hello - букв, «золотое приветствие». 1) Разовое вознаграждение, предлагаемое особо ценному работнику в начале его трудовой деятельности в новой фирме. 2) Разовая скидка новому клиенту.

Exercise 1. Translate the following into Russian.

• pay; to pay through a straight salary; pay-outs; to overpay; the pay-setting process; pay package; pay consultant; pay-for-performance; pay awards; payroll; pay settlement

• insurable earnings; fringe benefits; lucrative bonuses; perks; unemployment benefit; generous reward; compensation package; severance package

• involuntary redundancy; repeated unemployment (of a person); early retirement; duration of social insurance unemployment allowances; entitlement to unemployment benefits; to qualify for income supplements; labour placement offices; to destroy the morale of the workforce