I've been mildly interested in this subject for some time. Most 
remuneration is fairly easy to establish - employees are subject to 
management (including managers), consultants have to do their best 
against market forces and sole traders pay themselves what they can. 
That's all pretty straightforward!

The pay of the board of directors (aka 'executives') is a somewhat 
different matter. With a small company, and a small board, that is 
privately owned it is closer to the position of a sole trader. So, 
again, no real problem there. Private companies might pay their chairman 
and board excessive amounts compared to the business, but it is their 
business, so if they choose to run it into the ground in this way, that 
really is their affair - though it might be unkind to their employees!

With a public company the whole balance of power shifts. Now the board 
reports to share holders. If it is a recent floatation of a small 
company, this might be the founder and the bank, so the bank will call 
the shots - again, that's simple enough as it is mainly the bank's money 
at stake, so, when it rains the bank can, as is usually their wont, call 
in all the umbrellas. Unfortunate, but not a difficult thing to 
understand or control.

With a large public company the share holders are unlikely to be just 
one bank. Rather it will be a large community of owners - particularly 
the FTSE 100 or similar. Quite where the 'real' ownership lies is 
problematic. The biggest voters at an AGM, voting to elect board 
members, are likely to be institutions - insurance companies, pension 
funds, investment trusts, unit trusts, hedge funds as well as banks.

With a number of these institutions, the funds that enable them to hold 
enough shares to have enough sway to move the vote significantly have 
been provided by a large community or small holders or trusts or 
pensions. Generally, though, the institution appoints a representative 
to attend and vote in its interests.

The argument in favour of this set up is that it is 'democratic', though 
this fails, as pensioners, for example, have no say in how their pension 
fund votes on various matters at AGMs. It can also be clouded of the 
company buys back voting shares and the board can use them to vote for 
itself.

Arguments against the system are really based on results. The idea is 
that all shareholders have an interest in increased dividends. This, of 
course, is true of fund holders generally, but not of all share holders, 
many of whom would prefer an increase in the stock price. The board, 
however, has only direct control over dividends and indirect, if any, 
control over stock prices. So, the argument goes, or went, they ought to 
be judged by their dividend performance.

The remuneration of the board is tucked away at the end of the annual 
report, so most shareholders are not aware of how much individual board 
members are being paid, nor what their increases are, nor, most 
importantly, how their remuneration matches their performance. This 
usually only comes to light when some scandal occurs.

It would seem sensible to try to devise some method of linking 
performance to remuneration so as to encourage the board to fulfil 
shareholder's desires - both for good capital growth and good dividend 
return.

Legislation doesn't help much, with the global reach of companies 
enabling them to re-locate the company to a place where the law is most 
lax in this regard.

It seemed to me that a fairly simple metric could be devised and used by 
stock analysts (including fund managers) that would make the performance 
relative to pay simple to understand and simple to compare between 
companies and boards.

I'd be interested in any thoughts on this matter. As a strawman metric, 
I'd suggest that two curves are plotted for the past five years. The 
board and Chairman's remuneration is only revealed in the annual report, 
so only one point can be plotted for each a year. If dividend growth, 
capital growth and the board and chairman's remuneration over the past 
year are represented as decimals ( this year - last year ) / last year. 
Doesn't a plot of the growth of both payments divided by the growth of 
the business show how relatively well the board is being paid compared 
to growth over the period?

To compare companies, the growth plots over five years can show how well 
the board is paying itself relative to the growth of the company. This 
ratio gives an objective measure of performance that is independent of 
the size of the company.

Now it might be argued that it is much harder to get double digit growth 
in a large, rather than a small, company. That is no doubt true, but 
we'd expect these ratios to be similar for companies of similar size, 
so, it would be easy to correct for that.

I think that it might be instructive to apply this formula to some 
companies whose history is well known interesting in this regard to see 
the graphs over the past ten years. I'd recommend Hewlett-Packard, IBM 
and Apple as good technology stocks to compare in this way. I think that 
they'd make the point very well and give templates to apply to establish 
how well other companies are doing in this regard. This should enable 
fund representatives to ask a simple question - why is your exectuive 
remuneration curve looking more like HP's than IBM's? for example.

Any thoughts?