Friday 6 March 2015

A Wonderful Metric For Greed

Michael Meacher writes:

It has been reported today that Bob Dudley, chief executive of BP, received a 25% rise in total pay and bonuses last year even though shareholder returns deteriorated and company profits fell back significantly because of the halving of the world price of crude.

According to BP’s annual report published yesterday, his overall pay rose from £6.6 millions to £8.25 millions. The report said “Bob Dudley’s remuneration is closely linked to performance(!). The pay he received in 2014 reflects BP’s delivery of strategic targets over the past 3 years”.

This is nonsense.

BP doesn’t say which strategic targets they had in mind, whether they were picked at the outset or selected now to give the best retrospective impression, how exactly they were measured, etc.

The shenanigans surrounding performance-related pay have been devastatingly exposed by the High Pay Centre.

They have found that since top pay took off from the Thatcher era in the 1980s, it is now normal for as little as a fifth of a top director’s earnings come in the form of a salary while four-fifths is made up of a range of ‘incentive’ awards.

But their research has discovered that there is either no relationship at all or at best an extremely weak relationship between directors’ pay and performance.

They have showed that the statistical correlations between on the one hand either pre-tax profit or earnings per share and on the other hand the subsequent bonus payments handed out were insignificant.

Specifically, 98.7% of the change in annual bonuses could not be explained by changes in pre-tax profit, and 99% of the change in annual bonuses could not be explained by changes in earnings per share.

Furthermore there was no noticeable correlation between long-term incentive plan (LTIP) share awards and either changes in total shareholder return over 3 years or changes in earnings per share over 3 years.

Altogether that amounts to a conclusive refutation of any idea that performance-related pay has any evidential foundations whatsoever.

Yet another way of putting pay-for-performance to the test is to compare the increase in directors’ pay over a lengthy period of time with indices of their firms’ performance over the same period.

On that basis the total earnings for FTSE 350 directors increased by 348% between 2000-2013.

Over the same period the corporate performance of their companies rose by 140% in revenue terms and by 195% in terms of pre-tax profits. In other words, directors were paid, or paid themselves, roughly twice as much as their companies earned.

There is one other sting in the tail.

When company fortunes slumped, did their directors’ remuneration fall proportionately? It most certainly did not.

Performance-related pay is a very convenient fiction designed to inflate top remuneration at least twice beyond what the theory pretends to justify, while at the same time only ratcheting up in one direction and virtually never falling when company performance lags – a wonderful metric for greed.

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