http://www.ft.com/cms/s/0/71267ed2-1ea7-11e6-b286-cddde55ca122.html#ixzz49R09oFJp

ft.com/companies

INSIDE BUSINESS May 22, 2016 12:39 pm

Piketty has last laugh as revolts threaten the pay status quo

Jonathan Guthrie


Economist is finding unexpected allies — stock market investors

Thomas Piketty’s 2013 tome Capital in the Twenty-First Century was
dismissed by diehard critics as doctrinaire, statistically flawed and
boring. Three years later the French economist’s broadside against
rising financial inequality is receiving validation from an improbable
quarter: stock market investors.

Last week shareholders revolted against the pay policies of Deutsche
Bank and Goldman Sachs. Similar censure votes have been registered
this spring at Citigroup, French carmaker Renault and a slew of UK
companies, including oil company BP.

Pay revolts are nothing new. At the WPP advertising conglomerate,
where chief executive Martin Sorrell received an eye-popping £70m last
year, they are an annual pantomime that is swiftly disregarded by the
board. The difference this year is that the rebellions reflect worries
at the wealth gap between executives and Joe Average. This is a
perplexing development for those who, like many in the private sector,
consider that the social mission of business is to make decent profits
and that investors should reward bosses accordingly.

Hans-Christoph Hirt of Hermes, a UK investment manager and consultancy
that campaigned against Deutsche’s pay plan, says: “There is a much
bigger sensitivity this year to large payouts and income inequality. I
have never seen these issues so openly discussed.”

The conservatively minded boss of a large City of London institution
agrees. “Income inequality is a very big issue, here and in the US.
It’s part of the subtext of what is going on in pay votes,” he says.

Gossiping over dinner, the finance director of a FTSE 100 company
says:
“Investment managers are clamping down on executive pay because if
they don’t, the government has told them it will.”

There is no evidence to support this rumour, which is inspired perhaps
by the willingness of the UK government to fix pay levels at the other
end of the scale via a National Living Wage. The government has, it is
true, sometimes forestalled bonus payments to bosses of bailed-out
banks.

Paris picked up the interventionist baton this year. The French state
was among investors that last month voted against the €7.3m package of
Renault boss Carlos Ghosn.

Given the new ideological overlay to pay votes, any social justice
warriors seeking coherence will be disappointed. Income inequality,
which has risen in the US and UK since the 1980s, is a fuzzy
background issue. Individual censure votes have tended to howl, as
they always have, at “rewards for failure”, or are nit-pickingly
specific to the companies concerned.

Both descriptions applied at Deutsche, where 52 per cent of
shareholders voted against an executive remuneration plan. The bank
made a €6.8bn loss in 2015. Its shares have fallen 60 per cent since
their 2014 peak. The timing was poor for the introduction of a
“divisional performance award”, whose targets would have been heavily
in the gift of a supervisory board that includes trades unionists.

The London leg of the insurrection kicked off last month, when 59 per
cent of shareholders voted against BP’s remuneration report. This
featured a 2015 pay award worth almost $20m for Bob Dudley. The chief
executive did not deserve a $1.2m bonus increase to about $4.2m in a
year when shares had fallen some 15 per cent, critics said.

Protest votes followed at big businesses including miner Anglo
American and Shire, the pharmaceuticals group.

At one level these mattered little. Slow hand claps for racy
remuneration were, with one exception, purely advisory. At another
level they mattered a lot. Not just because many London-listed
companies face binding votes next year. The displays of pique showed
that the consensus on pay that emerged in the noughties is collapsing.

Few European investors objected to big payouts previously, so long as
corporate performance was good. Now they say “quantum” — or absolute
amount — is important. This is reflected in the plans of Norway’s
$870bn oil fund to vote down packages it deems excessive. But
shareholders will not say how much pay is too much at the hypothetical
level that would help remuneration committees set it.

Similarly share options were replaced with share-based “long-term
incentive plans” at well-behaved UK companies years ago. LTIPs are a characteristic product of the overheated ingenuity of remuneration
consultants. The schemes are prone to fiendish complexity and paying
out deferred bonuses just when profits are flagging.

Investors agree that LTIPs have failed. They cannot agree what to
replace them with. Executive pay-setting as a whole appears just as dysfunctional as ever. Capitalism is no nearer to collapsing under its
supposed contradictions than when Prof Piketty published a book whose
title self-consciously reprises that of Karl Marx’s Capital.

The system by which capitalists reward their top bosses, on the other
hand, is looking decidedly wobbly.

jonathan.guthrie@ft.com

Copyright The Financial Times Limited 2016

--- SoupGate-Win32 v1.05
* Origin: Agency HUB, Dunedin - New Zealand | Fido<>Usenet Gateway (3:770/3)