Editor's View

The price of success - and failure

Nov 07 issue

The fat cat debate never fails to raise eyebrows. For the past decade at least, you could guarantee an annual eruption of shock as the bonuses of investment bankers in the City hit the headlines.

It’s been a fabulous opportunity for people to start showing how moral they are, pontificating about shameless avarice and materialism. ‘How can they be so greedy compared to what the ordinary worker takes home?’ they cry, losing themselves in the zeroes and forgetting that the financial services industry is the heartbeat of the UK economy.

Indeed, the fat cat debate is more an indictment of the English inability to celebrate success than anything else. In reality, if a company performs well, then those who are responsible for that success should be rewarded – period.

Questions arise, however, at public companies, when those rewards are given to individuals at underachieving organisations. High-profile examples include the heads of investment banks Merrill Lynch (Stan O’Neal) and Citigroup (Chuck Prince). Both had to depart because of the billions lost due to their institutions’ exposure to sub-prime mortgages, but they took pay-offs of around $160 million (£77.8 million) and $100 million respectively.

Our research report, Directors’ Salaries on AIM, reveals that the chief executives of the 50 biggest loss-making companies earned an average of £294,000, which is 23 per cent more than the £240,000 average for AIM as a whole. Some of these companies are undoubtedly investing in R&D in the expectation of gains to come. Others won’t be and, as the economy bites next year, you wonder how sustainable these kinds of rewards for failure are going to be.

An executive chairman at an AIM-listed marketing venture that has gone through a rocky patch talks perfect sense – in my view – when describing the company’s approach to remuneration: ‘We previously had a very sophisticated bonus scheme in place. Now it’s very simple: if you hit the annual target, you get a bonus, and it has the crucial effect of aligning senior management with shareholders.’

Of course, whatever stage you’re at, paying enough to attract talented people, retain them and keep them hungry enough to push the company onwards is going to be one of the toughest judgement calls you’ll make, especially as the economic squeeze continues over the coming year.

For more information about the full and comprehensive report, Directors’ Salaries on AIM, call 020 7250 7039 or click here to email us.