(IV) The rise of the new aristocracy

Paul Sweeney26/01/2012

Paul Sweeney: Mitt Romney’s pay of $42.5m – all unearned – in two years on which he paid an effective income tax rate of only 14.65 per cent summarises all I am saying in these five blogs on living standards. We have a new aristocracy, new barons and earls who live in splendour, whose children will live in untold luxury while most of us struggle. But unlike the barons of old who had contributed to crude welfare systems, many of these guys see it as their duty to contribute as little as possible to society. The post-war Social Contract is broken.

In the last post, it was seen that the middle is being squeezed. In this one we will have a look over the pay, or more accurately the remuneration, that some of the biggest and best of our great corporate leaders have paid themselves, and issues around why they get away with it.

It will be seen that even with the Crash of 2008, and the poor performance of many firms, they are a paying themselves far too much. And the shareholder value system which is supposed to govern them is clearly broken. The top executives run the top firms as personal fiefdoms – not to generate added value for shareholders, workers and communities, but mainly for themselves. The post war business model of “shareholder value” is broken too.

Indeed, in just five or seven years at the top of a major corporation, many top executives pay themselves staggering amounts. Such are the “rewards” extracted from the firms that they have become a new aristocracy, whereby, after a life of untold luxury, they can leave vast sums, often untaxed, to their descendants.

As the typical company board resembles a retirement home for the great and the good, usually male and from the same social background, with many cross-directorships (as shown so clearly for Ireland in Mapping the Golden Circle published by TASC in 2010). Boards are filled with retired businessmen, ousted politicians and, more recently, retired senior public servants from regulators or economic departments, all of whom are selected, by each other, on the basis of their unwillingness to challenge each other or the company’s executives.

In the UK there is a raging debate on executive pay and particularly on top bankers' pay. The UK public is incensed at the pay the bosses of the state owned banks are paying themselves.

RBS is 83 per cent state-owned and has been the target of the UK Chancellor's calls for restraint as the banks announce their bonus awards next month. Despite being under strong pressure to pay less to their bosses, and the fact that its share price fell by almost half in 2011 and that it has sacked thousands of employees – RBS’s board is going ahead with plans to pay big bonuses to its top executives. CEO Stephen Hester is getting the maximum pay-out of 6m shares for 2011 – worth about £1.5m on the closing price of a week ago. That is 25 per cent less than the £2.04m bonus he accepted last year. This is on top of his basic salary of £1.2 million.

John Hourican, head of its investment banking business, is about to receive a £5m share bonus that was awarded in 2009. The latest bonus round comes as RBS makes thousands more job cuts after deciding to close large parts of its investment banking business.

Bob Diamond, Barclays’ chief executive announced in line for a £10 million bonus, leading to renewed anger about the excessive rewards enjoyed by bankers. Barclays shed 3,000 jobs across the group last year.

Mr Diamond, once described by Lord Mandelson as ‘the unacceptable face of banking’, is “entitled” to a bonus in shares of up to seven and a half times his £1.35million salary.

Diamond introduced what he calls 'the no-jerk rule' and has encouraged at least 40 executives at his firm to find jobs elsewhere. The American-born chief executive of Barclays said he does not care how good people are at what they do, if they are not suitable, they will be told to go. He said dozens of executives have been shown the door after behaving like jerks or spending lavish amounts of money.

The median income of FTSE 100 bosses has soared from 47 to 102 times employees’ median earnings since 2000. Similarly, senior executives’ pay has quadrupled since 2002, while the FTSE 100 index has stagnated and employee pay has gone up by a fraction of the amount.

FTSE 100 directors had a 49 per cent increase in their total earnings the last financial years. This gave them an average pay of £2.7 million each.

Top earners at some of the world’s biggest banks are still taking annual bonus equal to their salary according to a survey by the Financial Stability Board, a Basel-based committee of regulators. The use of bonuses is particularly pronounced in the US and the UK, where bonus payments account for between 80 and 96 per cent of the total pay awarded to US banks’ highest-paid employees, and between 78 and 93 per cent of the total pay awarded to UK banks’ highest-paid executives, according to the survey.

The world’s super rich are taking delivery of ever larger and more motor yachts this year with the biggest being “Topaz” a 147 metre yacht built in Germany for the Al Nahyan family of Abu Dhabi. These cost over $100m and can cost $1m a week to charter. Topaz will be the fourth in length with Roman Abramovich Eclipse a 164m being the largest. In spite of the recession, more of these super yachts were sold last year than in 2010.

Let’s have a quick look at some of the remuneration packages which the executives of top companies are “earning”. And remember, there are then of thousand of staggeringly wealthy people, who like Mitt Romney have such vast wealth that it is generating incomes of tens of millions a year, without having to work. And most pay little tax, under the regimes which have become acceptable in even “social” Europe. Such is the level of acceptance of low taxes for rich people that some regular folks even are heard to “praise” Michael O’ Leary for paying his income tax here. But if his wealth is €600 million and it generates 5 per cent a year, that’s another €30m. What is the rate of tax he pays on this?

The highest paid UK executives in 2010/11 were Mick Davis of Xstrata who paid himself £18.4m, followed closely behind by Bert Becht of Reckett Benckiser at $17.9m. Next was Michael Spencer of ICAP at $13.4m and our own Sir Terry Leahy of Tesco at a mere €12m. Tesco refuse to publish separate accounts for their Irish operations in case we see how well they are doing here (with Government approval). Close behind was Tom Albanese of Rio Tinto at $11.6m.

This week the UK government watered down its plans to tackle executive pay. It is now only seeking to get shareholders to change company policy with a binding vote on remuneration. It eschewed direct regulation and the mild reforms were welcomed by the likes of PWC, the CBI employers’ group, and the Institute of Directors. Mr Cable, the Business Secretary, was under pressure from Downing Street, and withdrew the proposal that most worried companies’ bosses – putting an employee representative on the remuneration committee. He also backed off the reform to require companies to publish a standardised ratio between executive pay and employee earnings, which would have been more transparent. A single pay figure for total pay of each director is to be published, which is one small step forward. Cable is still unsure about barring executives from one company from sitting on the remuneration committee of another.

The British Labour Party recently promised a new regime of transparency and the publication of a league table of companies that have the biggest pay gaps between bosses and shopfloor staff and to have employee reps on the remuneration committees.

Francisco Luzón, a senior director of Santander, the eurozone’s biggest bank by market capitalisation, is retiring with a pension pot of €56m. He ran the Americas division for 15 years as an executive director. Santander remained profitable throughout the western world’s economic and financial crisis thanks in part to its lucrative operations in Brazil and elsewhere in Latin America.

The annual salary of Lloyd Blankfein, Goldman’s chief executive, more than tripled in January, from $600,000 to $2m. Bankers at other groups have had their fixed pay increased by between 30 and 100 per cent, depending on their seniority, according to headhunters.

A few years ago the head of Porsche Wendelin Wiedenkin was Europe’s highest paid businessman with €67m in 2007. There was outrage in Germany as CEOs who had “earned” 14 times average employees salaries ten years earlier, were by then pulling 44 times the average.

In an unusual move, shareholders at Cairn Energy’s blocked plans to award its chairman an extra £2.5m share incentive this week.

Moving to Ireland, just a few years ago, here was the pay of the Anglo Irish Bank Bosses in 2007.


Sure was not every cent of the 8.4 million paid to these guys warranted? Look at the value they added to the banks and to Ireland. But did not the Irish taxpayer pay just one of the debts run up by these immensely rewarded men on 25th January for a staggering €1.3bn.

Here was the pay of some top executives back in 2006

The above pay of Irish bosses is from “Narrowing the Pay Gap”, published by Irish Congress of Trade Unions back in early 2998. When it was published, few were interested in high pay, as the Crash, well underway, was hardly noticeable. Today, we have an inordinate focus on what our money as consumers or taxpayers is paying our betters/servants.

Andrew Smithers, an interesting UK financial commentator, of Smithers and Co, quoted in the FT on 6th January 2012, has suggested that “the whole corporate culture in the boardroom has changed with the rise of the bonus culture and share options for business executives. They have not responded by cutting prices and competing like fury, they’ve responded by cutting staff.” The average chief executive of an S&P500 company is only in the job for five or six years and their pay is often closely linked to the share price of their corporation or to its returns on equity.

That creates strong incentives to keep profits high in the short term, and Mr Smithers suggests that “these incentives changed the way in which management has acted in the recession. Instead of hoarding labour and cutting prices to increase market share, companies are sacking workers, holding prices and choosing to buy back their own equity rather than make new investments.”

In the next and final post on living standards, we will see what can be done to reform the scandal of the rise of this new aristocracy at the top of companies in our democratic societies. One which has distorted the management of these companies, often into losing billions, leading to many job losses and which contributed so much to the financial crisis.

Posted in: InequalityEconomicsTaxation

Tagged with: incomeinequalityincomestaxation

Paul Sweeney     @paulsweeneyman

paul-sweeney

Paul Sweeney is former Chief Economist of the Irish Congress of Trade Unions. He was a President of the Statistical and Social Enquiry Society of Ireland, former member of the Economic Committee of the ETUC, a member of the National Competitiveness Council of Ireland, the National Statistics Board, the ESB, TUAC, (advisor to OECD) and several other bodies. He has written three books on the Irish economy and two on public enterprise, including The Celtic Tiger; Ireland’s Economic Miracle Explained and Selling Out: Privatisation in Ireland, chapters in other books and many articles on economics.


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