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| Co-op executive pay reveals the depths that business has sunk to | Co-op executive pay reveals the depths that business has sunk to |
| (about 3 hours later) | |
| It must represent one of the greatest wealth grabs in history. British firms have been the object of a management coup to deliver extravagant executive pay. The argument is that this incentivises performance and drives companies forward. The evidence suggests the opposite. Performance, productivity and innovation across British business are touching new lows. Yet inequality, with all its pernicious side-effects, is at its highest level for a century. This is a bad deal for the economy and society alike. | It must represent one of the greatest wealth grabs in history. British firms have been the object of a management coup to deliver extravagant executive pay. The argument is that this incentivises performance and drives companies forward. The evidence suggests the opposite. Performance, productivity and innovation across British business are touching new lows. Yet inequality, with all its pernicious side-effects, is at its highest level for a century. This is a bad deal for the economy and society alike. |
| The virus has now infected the Co-op, one of our greatest retailers, but owned by its members as a co-operative. Board documents seen by the Observer show how degraded our business culture has become. In a closet deal executives are being paid twice their salary for simply staying put – a "retention" payment – because over 2013 and 2014 any performance related incentive in this troubled organisation would not pay out. | The virus has now infected the Co-op, one of our greatest retailers, but owned by its members as a co-operative. Board documents seen by the Observer show how degraded our business culture has become. In a closet deal executives are being paid twice their salary for simply staying put – a "retention" payment – because over 2013 and 2014 any performance related incentive in this troubled organisation would not pay out. |
| Thus chief executive Euan Sutherland is to be offered a guaranteed retention payment of £1.5m, unrelated to performance, on top of his base pay of £1.5m to bring his total package (including other benefits) to £3.25m. The other seven directors in the directors team are offered pro-rata deals. Nobody was ever meant to know that the entire team is to be paid retention payments; only the top three were to be publicised. The excuse is the Co-op has great challenges and the leadership need to be paid in the top quartile of executive pay. The executive agenda, intone the executive remuneration proposals, is "possibly the most complex one facing a large business in the country today. It involves fixing a business on the verge of financial collapse; turning round the food division after years of neglect; reforming a membership system that is faltering from a fundamental disconnect; and effecting a major governance change. It also entails rediscovering the purpose of the mutual sector's largest contributor; re-defining the social goals agenda to create a forceful campaigning organisation; balancing a highly sensitive political agenda across all of Westminster – and, finally, removing the taint of scandal and refreshing an iconic national brand." | Thus chief executive Euan Sutherland is to be offered a guaranteed retention payment of £1.5m, unrelated to performance, on top of his base pay of £1.5m to bring his total package (including other benefits) to £3.25m. The other seven directors in the directors team are offered pro-rata deals. Nobody was ever meant to know that the entire team is to be paid retention payments; only the top three were to be publicised. The excuse is the Co-op has great challenges and the leadership need to be paid in the top quartile of executive pay. The executive agenda, intone the executive remuneration proposals, is "possibly the most complex one facing a large business in the country today. It involves fixing a business on the verge of financial collapse; turning round the food division after years of neglect; reforming a membership system that is faltering from a fundamental disconnect; and effecting a major governance change. It also entails rediscovering the purpose of the mutual sector's largest contributor; re-defining the social goals agenda to create a forceful campaigning organisation; balancing a highly sensitive political agenda across all of Westminster – and, finally, removing the taint of scandal and refreshing an iconic national brand." |
| It is a useful list of the challenges facing the Co-op and its top team, but all top jobs involve tough challenges. That is organisational life. The core challenge though is not stated, although some of the elements – removing the taint of scandal, reviving the membership model, redefining the social goals – are on the list. That challenge is to marry Co-op values with a new and better functioning business model. What is astounding is that it occurred to nobody, not the executives themselves, that by being offered and accepting sums this large the management were trashing the very values they were on a mission to rebuild. | It is a useful list of the challenges facing the Co-op and its top team, but all top jobs involve tough challenges. That is organisational life. The core challenge though is not stated, although some of the elements – removing the taint of scandal, reviving the membership model, redefining the social goals – are on the list. That challenge is to marry Co-op values with a new and better functioning business model. What is astounding is that it occurred to nobody, not the executives themselves, that by being offered and accepting sums this large the management were trashing the very values they were on a mission to rebuild. |
| One result is the astounding payoff for the HR director. In February Rebecca Skitt was told she was to be "exited" for reasons that did not amount to "dismissal". To minimise "disruption" and to achieve a "clean break" she is to be paid her 100% retention payment for both 2013 and 2014, even though she is not being retained. This comes with a third of her entitlement to the long-term incentive plan as a "good leaver", even though she no longer has to be incentivised in the long term. The total pay-off is worth over £2m for 11 months' work. | One result is the astounding payoff for the HR director. In February Rebecca Skitt was told she was to be "exited" for reasons that did not amount to "dismissal". To minimise "disruption" and to achieve a "clean break" she is to be paid her 100% retention payment for both 2013 and 2014, even though she is not being retained. This comes with a third of her entitlement to the long-term incentive plan as a "good leaver", even though she no longer has to be incentivised in the long term. The total pay-off is worth over £2m for 11 months' work. |
| It is mind-boggling, and this in an organisation that claims to pride itself on its ethical and co-operative values. She is in receipt of no more than an almighty bung, in a wider remuneration framework that has taken " incentivisation" to gothic levels of irrationality. The remuneration committee, advised by consultants New Bridge Street who boast they advise 40% of Britain's top 350 companies, has but one reference point: "alignment with the market". | It is mind-boggling, and this in an organisation that claims to pride itself on its ethical and co-operative values. She is in receipt of no more than an almighty bung, in a wider remuneration framework that has taken " incentivisation" to gothic levels of irrationality. The remuneration committee, advised by consultants New Bridge Street who boast they advise 40% of Britain's top 350 companies, has but one reference point: "alignment with the market". |
| Yet the market's operation with whopping, crude round numbers – a world of 100 and 200% bonuses of base pay – drives a coach and horses through any system that attempts calibrated reward proportional to performance. Rather it is the arms race in pay I described in my Fair Pay Review for the government three years ago – a system in which everyone ratchets up their pay by attempting to be in the top quartile. If there is one organisation that you might expect to join, say, the John Lewis Partnership, in declaring independence from the arms race it is the Co-op. Instead it has set out to be a pace-setter. | Yet the market's operation with whopping, crude round numbers – a world of 100 and 200% bonuses of base pay – drives a coach and horses through any system that attempts calibrated reward proportional to performance. Rather it is the arms race in pay I described in my Fair Pay Review for the government three years ago – a system in which everyone ratchets up their pay by attempting to be in the top quartile. If there is one organisation that you might expect to join, say, the John Lewis Partnership, in declaring independence from the arms race it is the Co-op. Instead it has set out to be a pace-setter. |
| There is no need to pay directors as much as 130 times the average wage, or 250 times the pay at the bottom of the Co-op pay spine. Only 25 years ago the average multiple in British business was around 35 times, and plainly British business performance is not four times better now than it was then. | There is no need to pay directors as much as 130 times the average wage, or 250 times the pay at the bottom of the Co-op pay spine. Only 25 years ago the average multiple in British business was around 35 times, and plainly British business performance is not four times better now than it was then. |
| The distortion of values is scarcely credible. The government is hiring a new director general of public spending and finance to superintend £700bn from the public purse. You can imagine how the authors of the Co-op remuneration committee would approach the task – need for top quartile pay, toughest executive agenda in the country, restore public faith, get value for money etc etc. Instead the salary offered is £142.5k – handsome sum, sure, but modest when compared to the Co-op largesse. | The distortion of values is scarcely credible. The government is hiring a new director general of public spending and finance to superintend £700bn from the public purse. You can imagine how the authors of the Co-op remuneration committee would approach the task – need for top quartile pay, toughest executive agenda in the country, restore public faith, get value for money etc etc. Instead the salary offered is £142.5k – handsome sum, sure, but modest when compared to the Co-op largesse. |
| I don't think we can run our country much longer along these lines. Yet very few businesses – and certainly not the Co-op – feel capable of breaking out. If in trouble they feel they have to attract and keep the best; if doing well they feel they have to retain a winning team. Nobody – and no shareholder under current ownership rules – wants to be a bottom quartile payer. And so the gravy train goes on. | I don't think we can run our country much longer along these lines. Yet very few businesses – and certainly not the Co-op – feel capable of breaking out. If in trouble they feel they have to attract and keep the best; if doing well they feel they have to retain a winning team. Nobody – and no shareholder under current ownership rules – wants to be a bottom quartile payer. And so the gravy train goes on. |
| There are remedies. Organisations should annually publish the multiple of top to average pay, so everyone can see what is going on and ask tough questions when necessary. On top, if executives like Mr Sutherland want to be paid as capitalists, then they should put some of their base pay at risk to earn their bonus – a system I called earnback in my proposals. Unsurprisingly, executives want pay to move in only one direction – ever upwards. Like Mr Sutherland they want bonuses just to be "retained". The wider system needs root-and-branch reform (see the unacted-upon recommendations of the Ownership Commission and Fair Pay Review), but for the Co-op the remedies are closer to hand. It is owned by a democracy of members elected to its area committees, regional boards and main board. The executive thinks this democracy is part of the problem, suffering from a " fundamental disconnect". Now is the time for it to show its mettle. | There are remedies. Organisations should annually publish the multiple of top to average pay, so everyone can see what is going on and ask tough questions when necessary. On top, if executives like Mr Sutherland want to be paid as capitalists, then they should put some of their base pay at risk to earn their bonus – a system I called earnback in my proposals. Unsurprisingly, executives want pay to move in only one direction – ever upwards. Like Mr Sutherland they want bonuses just to be "retained". The wider system needs root-and-branch reform (see the unacted-upon recommendations of the Ownership Commission and Fair Pay Review), but for the Co-op the remedies are closer to hand. It is owned by a democracy of members elected to its area committees, regional boards and main board. The executive thinks this democracy is part of the problem, suffering from a " fundamental disconnect". Now is the time for it to show its mettle. |
| The Co-op's only conceivable future is as a values based retailer just like John Lewis, whose turnover this week topped shareholder-value-driven M&S. If those at the top don't accept that core proposition – and what it means for pay – then they must step aside for those who do. | The Co-op's only conceivable future is as a values based retailer just like John Lewis, whose turnover this week topped shareholder-value-driven M&S. If those at the top don't accept that core proposition – and what it means for pay – then they must step aside for those who do. |
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