How much are chief executives really worth?
Shareholder revolts put sharper focus on rewards given to top management
How much would you say Bob Dudley, the chief executive of BP is worth? Last year he was paid US$16.4 million; this year the company’s board planned to pay him US$19.6 million. However shareholders in the British-based company staged a revolt and voted down the pay rise. The vote is non-binding, so it will be interesting to see how this pans out.
Fueling their anger was the fact BP’s earnings plunged from a US$8.2 billion profit in 2014 to a US$5.2 billion loss. In these circumstances how on earth could the company’s board be recommending a 20 per cent pay rise for Dudley?
As ever this is not an open and shut case because BP’s heavy losses resulted both from the slumping oil price and the settlement of enormous claims arising out of the Deepwater Horizon oil spill. That disaster occurred long before Dudley came on the scene and, as for oil prices, well even a miracle-making CEO’s hands are tied in moving the price of a global commodity.
Although BP took a mighty earnings hit last year, Dudley is widely credited with meeting all the targets he was set and for having done much to restore the underlying strength of the business.
Pay levels in big companies tend to be determined by a set of matrices, usually revolving around targets met or missed. In this sense pay determination can be described as being “objective”, however, and this observation is hardly confined to remuneration matters, public companies have a particular responsibility to peer beyond the figures and display more than a modicum of regard for the wider considerations that flow from their decisions.
It really will not do for loss-making companies to up executive rewards any more than it would be acceptable for a company to hire more staff during a business downturn.
The word “public” attached to the term public companies should not only entail a high level of accountability to shareholders but also involves a wider level of accountability than is strictly required under the law. A case in point is the reputational damage inflicted on corporations like Amazon who have been exposed as being active tax dodgers.
Amazon investors may well applaud the company’s executives for minimising tax liabilities but this kind of thing carries weighty commercial consequences of reputational damage for a corporation that has invested so heavily in its brand and has achieved credibility due to the brand’s integrity.
No doubt aware not only of the possible reputational damage at BP but of wider repercussions for the corporate sector, Britain’s Institute of Directors took the unprecedented step of urging BP shareholders to join the rebellion against Dudley’s pay rise. The institute, one of Britain’s most prestigious business lobbying groups, is clearly worried about growing anti-big-business sentiment that will be fuelled by pay awards of this kind.
They have reason to be concerned because there is a sharper focus on the rewards given to top management. In Britain, shareholders have also voted against the proposed pay rise for the boss of Smith & Nephew and shareholder revolts are simmering at companies ranging from AstraZeneca to Reckitt Benckiser. A rather different backlash emerged when Richard Pennycook, the chief executive of Britain’s Co-op retail chain, volunteered to take a 60 per cent pay cut because he said he could not accept such a high level of pay at a time when the Co-op’s results remained weak. He was lambasted by fellow chief executives who seem to believe that he “was letting the side down”. Are these people totally tone deaf or what?
Meanwhile, back in Hong Kong, executive pay tends not to be controversial, mainly because most corporate leaders take the bulk of their remuneration by way of dividends. However there is growing interest in the very high pay levels prevailing in the local public sector, not forgetting the lavish perks attached to these jobs.
What never ceases to amaze me is the response to these criticisms emanating from the boardrooms of public companies to the smart offices of bureaucrats where you can hear the self-righteous bleating of executives declaring that what they are paid is nothing to do with The Great Unwashed, not least because they are worth every cent.
Yet public sector chiefs are getting taxpayer’s public money and listed company executives should expect to be accountable to shareholders; the line separating personal and public is therefore much thinner than they care to acknowledge. And, of course, this does not just apply to pay matters but to a range of other forms of behaviour that may, in the past, have remained firmly behind closed doors but is now peeking out into daylight and not looking too good out there.
As for Dudley, even if he has to struggle on with an annual pay packet of “just” US$16.4 million, he may well survive.
Stephen Vines runs companies in the food sector and moonlights as a journalist and a broadcaster