Old Mutual’s “replacement” remuneration policy has a bit of all the things that make executive remuneration such a flawed, self-serving process. It also contains many of the reasons why 21st-century shareholder capitalism has destroyed so much value and made the problem of inequality so much worse.

The story of executive pay at Old Mutual has been about paying each executive team as though it were in the top 10% of executive performers, and then paying it extra for undoing the damage done by the previous highly paid team.

The new remuneration policy designed to deal with the “unique” circumstances around Bruce Hemphill’s leadership takes this story to its logical and totally insane conclusion.

Essentially it’s about giving Hemphill a large fortune for undoing much of the work of his predecessors and getting the company back to where a lot of people think it should have been a decade or more ago (but wasn’t because of previous “executive talent“). It’s a bit like paying kidnappers to get the body back. Of course Old Mutual is not alone in its approach, which combines lack of institutional memory with extreme optimism. Essentially, remuneration committee members are required to have an inability to recall the circumstances around earlier unsuccessful executives.

This ensures every new executive team gets to start from scratch. And it starts with a desperately hopeful remuneration committee so keen to have the best executives it immediately agrees the new team should be paid as though it were the best. This explains why Old Mutual says, in defence of Hemphill’s huge bonus, that he cannot be punished for the failure of earlier executives. The company does not explain who should get punished. It seems not even the earlier executives get punished, or at least not in the way ordinary workers understand the concept of punishment, which is to lose your job with a few weeks’ pay.

Somewhere in the organisational structure of every listed company there’s a warp in the rewards/responsibility metrics. At the bottom end, if you don’t do your job, you get fired, with almost nothing. This changes as you move closer to the top until, at the very top, if you don’t do your job, you may or may not get fired but if you do get fired you get enough to ensure you never have to work again.

The Old Mutual remuneration committee is to be commended for designing a package that contains all the buttons the institutional shareholders like to press. It is presented as reasonable. (Of course Hemphill has to be promised a lot of money for rescuing the company.) It has a touch of precision about it. (Though we’re told the circumstances are unique, the committee has found peer groups.) It is aligned with shareholder interests. (Hemphill will get the full long-term bonus only if shareholders do well in year one.)

And as the institutions press these buttons they can pretend to have addressed the potential conflict that exists because of the gap between them as the hands-off owners and management (the centuries-old “agency problem“). In this pretence they convince themselves they are not a huge part of the problem.

They can ignore the reality that the structuring and size of executive pay has worsened the “agency conflict”, not reduced it. It’s a system that offers huge rewards after just three years. (How is it possible that a life insurance company can define long-term as three years?) No true owner of any business would expect to be as generously rewarded after such a short period. Indeed, why would anyone risk setting up his or her own business when the rewards from joining the ranks of a listed company are so generous and risk-free?

Twenty years of unrestrained executive pay policies have destroyed corporate value and skewed the rewards to a small group of lucky individuals.

It is the biggest threat facing capitalism now.

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