This has been topical recently, with a number of highprofile cases of executives being paid amounts which do not obviously align well with their company’s performance. Some investors have expressed discontent at these pay packages and some have even gone so far as to vote against them. Investors have had their “Say on Pay”. 50 And, as is often the case at this time of year, as the pollen count has picked up there has been talk of a “shareholder spring”. Ultimately, however, these investor votes are binding on neither management nor boards. They are a “Say on Pay”, but not a “Stay on Pay”. With very few exceptions, no differences were made to executive compensation packages as a result of investor action. And the cases of investors actively voting against pay packages have in any case been rather rare. The “shareholder spring” may be as ephemeral as that pollen. Yet high executive pay-outs potentially have implications, adverse ones, for value-creation by companies and thus longer-term returns to investors. Monies paid out to executives are monies not being re-invested in the company, reducing investment in physical and human capital. They also drive a wedge between management and their employees – a wedge that has widened to over 150 times median wages in the UK and over 300 times in the US. 51 That, in turn, erodes social capital. A company, like a country, whose physical and social capital is being eroded is one whose wealth-creation capacity is being impaired.
What applies to pay-outs to executives applies, with equal force, to pay-outs to shareholders. Whether as dividends or buy-backs, these too have been on a steadily rising tide over recent decades: from around 10% of profits in the 1970s, to 60–70% today, as short-term shareholder demands have risen steadily. 52 Yet monies paid-out to shareholders are monies also failing to be re-invested in future value creation by the company. In short – too short – the shareholder-centric model may have become a recipe for depleting long-term company wealth-creation and, thus, societal well-being. 53 Or that, at least, is the contention. So what to do about it? Earlier this week, an interim report was issued on “The Purposeful Company” by the Big Innovation Centre. 54 I should declare an interest here, as I and others at the Bank have been involved in putting together this report. The report serves two  49  Big Innovation Centre (2016). 50  “Say on pay” is a term used to describe a rule in corporate law where a firm’s shareholders have the right to vote on the remuneration of executives. 51  See High Pay Centre (2015) and Economic Policy Institute (2015). 52  Haldane (2015). 53  For example, Asker et al (2014) and Davies et al (2014) show, for the US and UK respectively, that private companies invest more than otherwise-equivalent public companies. 54  Big Innovation Centre (2016). 12  BIS central bankers’ speeches  purposes.