From Alison Rose to water exec bonuses, massive payouts are killing productivity

The last week has been momentous on various fronts. The decision by the NatWest board to scrap £7.6m of former chief executive Alison Rose’s potential leaving payout was almost buried in the avalanche. But it offers a glimmer of hope amidst the overall gloom.

The decision itself has all the hallmarks of a classic corporate compromise. NatWest said no finding of misconduct had been established against her, but they still decided that Rose did not fit the “good leaver” status under the bank’s share plan, a decision she accepted.

The legal niceties aside, the whole episode has been a PR disaster for NatWest. The share price of the company is down more than 30 per cent from its peak at the start of the year.

But, for once, poor performance at the top of a company has not been rewarded. Whilst Rose will hardly be a pauper, walking away with a package worth some £2.4m, she has agreed to forfeit three times this amount.

That Rose is still pocketing far more money upon her exit than many workers will be paid in their lifetime has scarcely warranted a mention. We have become accustomed to huge boardroom rewards as executive pay has  skyrocketed. Fifty years ago, the typical compensation of a CEO in America was around 30 times more than that of the average employee, by the mid-1990s, this had risen to a ratio of 100 to one. Now it is over 300 times as much.

Given the increase in executive level compensation, we would expect to see an improved performance of the overall economy in recent decades. The evidence, however, points firmly in the opposite direction. The rate of growth of the economy as a whole has slowed.  Between 1957 and 1987, real GDP in the US grew by 3.5 per cent a year, but by only 2.5 per cent 1987-2019. The reduction in overall growth in the UK and Europe has been even more dramatic.

More positively, NatWest is not the only straw in the wind. Ofwat revealed last week that half of the water companies paid out bonuses for the past financial year despite the sewage crisis. These included United Utilities, which had the most sewage spills in 2022, as well as Anglian and Wessex Water which came at the bottom of the Environment Agency’s league table for environmental performance.

However, the bonuses were paid for by shareholders and were not added to customer bills.  Even the usually docile regulator, Ofwat, has started to bare a few teeth, stating that “Customer trust is damaged when executive bonuses are not aligned to water company performance”.

Employees are of course aware of the disparity in treatment and pay. An ordinary bank clerk linked to something which damaged the company’s reputation would probably be dismissed at the speed of light.

In these circumstances, why bother to make too much effort? It is no accident that the collapse in productivity growth across the West began immediately after the financial crisis. Bankers nearly destroyed the global economy but walked away unscathed with millions of dollars.

People do not mind individuals making huge amounts of money when they get it from applying their unique talents. George Clooney and David Beckham, for example, are both widely admired. But most executives, undoubtedly able though they may be, are interchangeable.

We would be wise not to read too much into a couple of stories concerning a bank and the water companies. But restoring a sense of fairness might be the key to solving the productivity puzzle.

As published in City AM Wednesday 15th November 2023
Image: Flickr
Join our newsletter and get 20% discount
Promotion nulla vitae elit libero a pharetra augue