|Directors have access to the wealth
of the corporation before the shareholders get to it.
Directors run corporations. They are elected by the shareholders.
The terms of their election (majority vote required, eligibility
for re-election, period before re-election, circumstances for removal)
are set by each corporation's Articles. These are the rules that
govern the way a company does business. Articles are approved by
shareholders within a framework laid down by Law.
....but directors' remuneration
'Remuneration' is the word that covers the wide range of avenues
through which directors can become better off: pay, deferred pay,
bonuses, share options, share grants, pension rights, benefits.
For a public company these items (and the other terms of a director's
contract such as his severance terms) are set by a Remuneration
Committee of independent directors of the company. 'Independent'
means 'non-executive' and without other potentials for bias.
The Remuneration Committee publishes a Report giving
full details of directors' remuneration. Shareholders may vote on
this report but the results of the vote are non-binding. So in effect
directors' remuneration is set by other directors.
Company directors are as conscientious, honest and public-spirited
as any other group bound together by a common occupation. But the
consequences of this arrangement are both obvious and predictable:
remuneration-creep. Increase in directors' remuneration has outstripped
the increase in average earnings by many percentage points annually
for at least 25 years. So long as these remuneration setting arrangments
continue, so will the directors' pay explosion.
It's not the high profile cases that matter so much:
it's the many cases of 'average' that are paid 'well-above-average'.
A second-rate finance director of a second-rate company would consider
himself poorly rewarded if he did not get more than the Prime Minister
as basic, with bonuses and options on top. That cannot be healthy,
The pay explosion
Senior managers are paid by directors. The expectations of
senior managers are coloured by the remuneration levels on the next
rung of the ladder. And the remuneration of directors is validated
by the pay of those on the rung below them. So senior managers benefit
Middle managers are paid by senior
managers . The expectations of middle managers are coloured
by the remuneration levels on the next rung of the ladder. And the
remuneration of senior managers is validated by the pay of those
on the rung below them. So middle managers benefit from remuneration-creep.
Junior managers are paid by
..Well, you get the
....and a special cheer for
Share options are a smoke-and-mirrors way of delivering the large
amounts of cash that directors pay themselves. Options appear to
reward achievement by being tied to a rising share price. In fact
they reward share price volatility. To understand this, look at
the many companies where the share price now is at much the same
level it was 10 or 15 years ago but the managers have made large
amounts of money from the excitements in between. Or look at performance
fees where the same mechanism works in a different context.
If you don't believe us, believe Warren Buffet, the
legendary American investor: "Stock options are a fraud on
.........and the lesson for
Left to itself this mechanism will undermine the market for company
shares. That is too serious to be allowed to happen, so it won't.
But it's not at all clear how this drama will play out, whether
by legislated constraint or the invention of new investment vehicles
that protect against these excesses.
For now, just be aware that directors and employees
have a claim on the wealth of their corporations in priority to
those of the shareholders. not legally, but practically - over the
long term. So do not put your life savings where you think this
claim might be abused.