A report released today has found that the average pay for FTSE 100 directors increased by 49% in the past year. This is at a time when the average real pay of most citizens has decreased by close to 5% and the returns on the FTSE 100 have been negative! Is this not more evidence (if it was needed) of growing wealth inequality in our society?
There are many economists who suggest that high pay incentivizes directors and solves what is known as the agency problem. However, high pay appears to be more due to managerial opportunism.
What needs to happen to reform CEO pay? First, stock options as a form of compensation have to go. Second, my work with Gareth Campbell (click here) suggests that directorial share qualifications, which were common until the early twentieth century, should be re-introduced as managers face a downside to their bad decision-making. Third, golden parachutes need to be removed - why should executives be rewarded for bad performance? Fourth, the practice of distributing cash via stock repurchases needs to be made illegal (as it once was) as this method of returning cash to shareholders creates all sort of malincentives and means that directors do not face the discipline of having to return cash to shareholders in a regular and systematic manner (i.e., dividends).