Not just bankers facing flak

I suspect this will not stop with bankers. Business executives from outside the financial sector are for the most part as shocked and disgusted as every-one else at the amount bankers have paid themselves, but seem unaware that they too could easily get caught up in the backlash. Their complaint about bankers is that they did not deliver the performance they took the money and ran before it became apparent that what they had claimed was profitable was in fact disastrously loss-making. This, they say, contrasts with businessmen who have to deliver proven performance before they get the money.

Unfortunately, that does not really wash. Businessmen clearly do not have such a conflict between short- and long-term success as do bankers but that does not mean performance pay works any better in the non-financial sector.

The annual study by the remuneration consultancy division of Deloitte shows that the average payout on bonus schemes is about 70% of the maximum. This suggests that payment is treated more as an entitlement than as something linked to a defined target.

Deloitte also says that as we head into a downturn, the size of the potential bonus is being increased quite significantly. The probable result of this next year will be that people fail to hit as many targets because of the recession, which means they will get only 50% of the maximum, not 70%. But because the pot has been enlarged, that 50% will be worth more in cash terms than the 70% was.

Such juggling may explain why there is no visible link between pay and performance in companies, even though they all say it is the basis of their remuneration. Patterson Associates, another London remuneration advisory firm, collated pay data over five years to capture fully the cost of retaining a FTSE 100 chief executive, and matched it to total shareholder return over the same period.

It says: "CEO compensation bears no relation to total shareholder return performance. Long-term incentive plans are clearly driven by overall performance but other elements of pay (salary and bonus) serve as a filler for underperformers ensuring that those whose LTIPs are likely to fail, or partly fail, to pay out receive rewards in other ways."

Most institutional shareholders understand that the whole thing is a charade but have been broadly prepared to tolerate it as long as the good times continued to roll. But their mood is beginning to change, and there is growing anger that now things are turning down, the pain of the downturn is not evenly shared.

They object to the way they are frequently bounced, or indeed blackmailed, into rebasing incentive schemes to reflect plunging share prices on the grounds that there is no incentive to the executive to perform if the plunge has made his targets so distant he cannot attain them. That makes a nonsense of the claim that performance pay aligns the interests of executives and shareholders. No one rebases the shareholders' investment back up to the old price to eliminate the loss.

The point of this is not to be brutal about performance pay, though I have long shared the view first put forward by the late Alastair Ross Goobey that executive incentive schemes too often resembled the Caucus race in Alice in Wonderland no one knew when the race started, when it ended or who had won, but everyone got a prize.

Rather it is to warn that, with a recession looming, corporate executives need to tidy up their act or they are likely to be swept up in the same wave of anger battering the bankers. Instead of quietly massaging up their pay plans to offset the downward pressure of recession, they should look instead to having in place schemes whose every line they can justify before the court of public opinion.

They will do themselves no favours if they collect big bonuses for performance when the profits have crashed, the workforce has been cut and the share price has halved. They should look at what is happening to the bankers and be afraid.