At last, the misery is over. Aston Villa have played their last home game of the season and I can now put my season ticket where, frankly, I should have disposed of it long before Christmas — in the bin.
In fact, despite it being a tedious 0-0 draw, I’m glad I went on Saturday. I enjoyed the humour of the Villa fans, determined as they were not to let a near record-low points total spoil their traditional end-of-season party. But as well as to have a laugh, they were also there to protest at the mismanagement of our once great club and, let’s face it, after a season like the one we’ve had, we all needed to let off steam.
What so irks the Villa faithful isn’t relegation itself, but the desperately poor performance of players who earn more in a week than a typical fan takes home in a year. Without wishing to make a political point, I wonder whether their annoyance is symptomatic of a wider resentment in Britain, and indeed the much of the Western world, at the huge disparity in wealth between “the 1%” and the rest of the population?
By any objective standards, executive pay is now far higher than it needs to be, or than is good for investment returns or the wider economy. A CEO of a listed UK company earns, on average, around £4.6 million a year; that means they earn more in three days than their average employee’s annual salary. A recent survey of the UK’s top headhunters by London School of Economics found that most of them believe executive remuneration is “absurdly high”.
Of course, the counter-argument most frequently used is that any attempt to curb executive pay would result in a “brain drain”. But that is disputed by the author of the LSE report, Max Steuer:
“In Denmark and other continental countries, CEOs don’t get this high pay but they don’t seem to leave. The idea that if their pay were lower, British executives could show up in New York and say we would like to have your jobs, is a little implausible. Performance plays very little role in the selection process. Contrary to people saying these chief executives are ‘unusually able’, we don’t find any evidence of that.”
So, why is this situation allowed to continue? Well, one explanation, according to Madison Marriage from the Financial Times, is that the very people who are able to rein in excessive pay — namely asset managers — are themselves extremely well paid and therefore compromised.
She quotes Luke Hildyard, policy adviser on corporate governance at the Pensions and Lifetime Savings Association, as saying:
“There is quite an obvious conflict of interest in that the high pay culture in big business sets the tone for what financiers are paid and vice versa.
“The idea that top executives are so few and far between that you have to pay them astronomical sums of money to beat your rivals and get the top talent is debatable, but it’s an idea that suits big business to endorse.
“It’s just not in the interest of asset managers to draw attention to the issue, or to hold business leaders too tightly to account.”
In her article, Madison refers as well to a report by As You Sow, a non-profit organisation based in California, which also reinforced the view that investors are reluctant to take a tough stance on executive pay. Many investment groups, the report claims, “routinely rubber stamp management pay practices, enabling the worst offenders [to continue awarding excessive pay to senior management]”.
There is, of course, another big reason why soaring pay for asset managers is damaging for the wider economy. That is, simply, that the more highly fund managers are paid, the harder it is for them to provide genuine value for investors net of charges.
By way of example, Richard Woolnough, a City of London bond fund manager, has earned £32 million over the past two years. In the US, pay deals are even more obscene; average annual pay for those who made the Forbes list of the 25 highest-earning hedge fund managers in 2014 was a mind-boggling $972 million (£682 million). Is it any wonder, then, that only a tiny fraction of actively managed funds are able to beat the index after costs over any meaningful period of time?
These sorts of salaries are completely unsustainable, as are those for many of our top CEOs. True, some big investors, such as Legal & General in the UK, and the Dutch pension fund PGGM, are trying to tackle the issue. But, ultimately, it may require regulation or some other political intervention to resolve it properly. Forcing asset managers to remove the plank from their own eye before addressing the speck in other people’s would be a sensible first step.
Of course, few would begrudge real stars, genuine wealth creators, earning very large salaries. Too often though, business leaders and fund managers, are earning vast amounts for very mediocre performance, rather like some footballers I could mention. Great for them, of course; not so good for the rest of us.
Related post:
Why should fund managers earn more than accountants?
Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.
