A COMMISSION TO BE SET UP TO REFORM THE ISSUE OF EXECUTIVE BONUSES

There is nothing intrinsically wrong with bonuses. Even very large bonuses – a bonus of, say 20 million pounds – might be justifiable if a unique and outstanding executive had bought huge added-value to a company. But the truth is that in recent years bonuses have become a racket, and snouts have been deep in the trough.

Acc to Matthew Lynn in MoneyWeek ” A decade ago it was still rare for a FTSE company Chief Executive to earn a million a year. Now almost £5 million is the going rate. Yet businesses are hardly five times more complex, or five-times better run. And the FTSE is still lower than it was in 2000….. A small group of executives sit on each other’s boards, and routinely vote each other huge pay rises – and shareholders pay for it.”

The bigger issue, though, is not so much that it is a racket, or that executives have in effect been legally stealing from their companies, but that the present structure of bonuses means that in many cases the executives are incentivised to make short-term actions that will increase their bonuses, and that these actions are actually damaging to the long term health of the company.

This is all too complicated to explain here. But one quite vivid example may be Northern Rock, where they rushed to increase business by offering mortgages of more than 100%, against all the accumulated wisdom of our financial history. I am not suggesting that we should be chippy about bonuses, but that there should be a touch on the tiller – namely a reform that meant that bonuses were more in line with the LONG-TERM health of the company, and the long-term interest of the shareholders.

I would suggest that any Commission or body that studies this should consult with Warren Buffett, the most successful investor in world history. He has for many years railed against the abuse of bonuses, and suggested reforms. Although the United States has different laws, in fact the principles are very much the same.