UKH

So much for big covid cuts, overall pretty much business as usual, especially on incentive schemes.

https://www.bbc.co.uk/news/business-53654712

https://www.theguardian.com/business/2020/aug/05/uks-largest-firms-fail-to-...

In reply to Offwidth:

Did you expect the whole COVID-19 thing to change much, really?  There's nothing surprising here....

In reply to Offwidth:

In such difficult economic times I want the very best business leaders to make sure that the businesses themselves survive thus keeping as many jobs as possible for everyone. 

The best people command high salaries.

I'm fully aware that a lot of people on here will likely disagree!

In reply to maybe_si:

The problem is there doesnt seem to be much correlation between those high salaries and the performance.

In reply to mondite:

You don't know that. 

If a company does badly, it may have done even worse under someone else.

Not saying one way or the other, but I would hesitate to be quick to judge

In reply to maybe_si:

I don't disagree, but anyone who considers themselves as one of "the very best business leaders" should have the awareness to know that voluntarily reducing their own pay is very good PR and would also play well with their employees.

In essence 64% of CEOs are pretty clueless.

In reply to ClimberEd:

The reverse is, of course, equally true. So best to save the cash eh?

There are plenty of studies showing no real link between CEO pay and the performance of the companies. There are outliers eg those who have created the companies from scratch but with most of the professional managers it is not obvious why paying them so much more than their counterparts in the 60-70s is getting a company in return. Even organisations such as CIPD are coming down on the side of the current system is failing.

In reply to ClimberEd:

CEOs and Executive Directors are obscenely overpaid. Whereas in the 70s an MD/CEO was paid x 25 an average workers salary, now they earn more than 100 times the average workers salary. Unfortunately shareholders fall into the same trap every year and vote for these disgraceful increases in the hope that the company exceeds expectations and they profit from enhanced dividends and an increase in the share price. Whats even worse is when failing companies award golden handshakes to those in charge of the failures.

In reply to mondite:

You see, it doesn't really work like that. 

If there are 50 'CEOs' and you want one of the better ones running your company you have to pay more than another company. And so forth (I presume the rest of the logic is fairly obvious)

You can argue until you are blue in the face about all the reasons it shouldn't happen or, with even more futility that it isn't 'worth it', but until all companies make a coordinated drop in senior executives pay, you should understand that it will continue. 

In reply to Ridge:

Now why on earth would someone do that?! 

Unless they'd been at it for so many years such that they had a huge enough pile of cash that losing for example, 30% of a years pay, made little difference to their overall financial situation. 

Apart from the outlier, who is simply 'not normal', they aren't in it for PR or their employees good will

In reply to Offwidth:

I probably shouldn't bother commenting, but I see it again and again. 

People get annoyed/frustrated/wound up because a section of the world isn't following their values or behaving how they think it 'should'.  The CEO doesn't have the same attitude as you, which is probably how they ended up being CEO. So don't expect them to behave as you think they should. 

In reply to ClimberEd:

You see, it really doesnt work like that.

The evidence simply doesnt support the claims about the competitive markets in CEOs. Otherwise you would be having lots of CEO going from the lower paid countries to the high paid countries.  This doesnt happen on any real scale.

In reply to mondite:

We're going to go round in circles. So I won't engage further beyond suggesting you stop thinking that spurious evidence, at best, supports your ideas, and start looking at the way the world actually works. 

In reply to ClimberEd:

 

I don’t think that is the problem. The problem isn’t the values of the CEOs, shareholders, and other executives, (which are reasonably diverse in my experience) it’s their incentives, or rather, lack of skin in the game that is causing an issue.

It’s rather obvious with covid19. Look at all the businesses who are now relying on various stimulus or furlough schemes (i.e., the taxpayer) for survival.

There is no economic incentive to run businesses sensibly with reasonable compensation if the taxpayers or low interests save your ass when things don’t go well.

In reply to Alyson30:

Whilst incentive schemes are to be encouraged, and perhaps structured better, I find the idea that an employee (which a CEO is) shouldn't be paid, or worse, if the quantitive outcome of their work isn't successful, rather silly. 

In reply to ClimberEd:

Your arrogance is truly impressive as is your ability to dribble out cliches. I do understand perfectly well how the world works which is why I am not so stupid as to believe in the "pay for the best" claim.

The evidence which is not spurious simply doesnt support this claim. Here, for example, is a article from that well known radical left wing paper the economist mentioning just some of the many studies which dont support this delusion.

https://www.economist.com/business/2020/07/11/how-ceo-pay-in-america-got-ou...

In reply to ClimberEd:

Nobody says they shouldn't be paid.
But pay has to reflect performance and added value, otherwise it's not pay, it's rent extraction.

I don't see why it is silly to link pay to long term performance.

Typically CEOs will justify their increase in pay by their ability to produce higher returns to shareholders. And it makes perfect sense.

The problem arises when the taxpayers and the central banks systematically pump trillions into the system to prevent those returns from crashing down, or pay doesn't move down when returns are indeed crashing down.

In reply to maybe_si:

It is immoral that during and after Covid when millions may loose their jobs that a C.E.O. can earn 100x the average salary. They delegate most of the decisions anyway. That is not caring capitalism. 

In reply to Offwidth: Also , define performance correctly,,, I've worked for someone who earned a lot of money for a very strong short term financial performance that led to it losing market dominance and a 10+ year period of market loss

In reply to Philb1950:

It's not that it isn't caring capitalism, it is that it isn't capitalism at all.

In reply to Alyson30:

Spot on. These Chief Execs of being pics etc are just  upstart employees. 
 

The  risk takers and entrepreneurs are the true embodiment of capitalism .

In reply to Offwidth:

As a former economics lecturer, it no longer surprises me when I hear free marketers such as ClimberEd favouring "market forces" . The beautiful simplicity of the theories of supply and demand appeals to them, but when you start muddying the waters by discussing externalities, market failure, barriers to entry and so on, they just put their fingers in their ears and go "la la la la la" It's like a religious cult that harks back to the dark days of Thatcherism.

In reply to Sayon:

If we were letting market forces do their job, a lot of CEO and other executives would have lost their jobs and high compensation in 2008, and a lot more again in 2020, simply because the corporation they work for would have gone  bankrupt.

But the point is, we aren't actually letting markets forces do their jobs, instead we use central banks and taxpayer money to intervene on a massive scale and protect them for failure.
 

In reply to Alyson30:

I agree with you here- many who espouse market forces would run a mile if a results-based approach was introduced, rather than having their existing privilege rewarded. It's always a one-way bet- be rewarded when things are on the up, and face no consequences in a downturn. 

Sadly, the approach to executive pay has percolated through into the public sector over the years, where the cult of the great leader has seen huge pay rises for managers in,say, education, despite recruiting exactly the same people to do the same job. If anything, the pay rises seem to have generated a more reckless, cavalier attitude to the role; witness the numerous scandals in the FE sector and increasingly the Higher Education sector too.

In reply to Alyson30:

Wait, why isn't this capitalism?

In reply to Philb1950:

It may not be caring capitalism, but it is a massively sweeping generalisation.

Question is - why aren't more people applying to be CEOs if its such a cushy number ?

In reply to Sayon:

I'm fully cognisant of externalities, and the like, as well as the fact a 'free' market only works with the framework it is given. 

If you're worth a few million, are you going to bother with the stresses and strains of being CEO for pay that isn't going to significantly add to that. Nope. 

In reply to ClimberEd:

Having a relative who has been a CEO of a company with 100,000 plus employees, I can honestley say the stresses and strains are a driver for them, it what also makes them tick, they thrive on it. He was also worth a few miilion ( well more than that, becuase he had built up successful businesses before switching to being a CEO).His " driver" is running successful company's and growing them.These are people who do not like to be sat twiddling their thumbs even with a few million in the bank.

What you suggest is not their way of thinking.

Classic rags to riches story, son of a coalminer, left school at 14, first job an usher in a cinema.

In reply to GrahamD:

Do we now that they aren’t? We have certainly seen huge growth in business administration as an undergraduate and graduate subject and a general growth in business schools.

In reply to The New NickB:

You do not usually apply to be a CEO, you are normally headhunted.Somebody has tracked your career.

In reply to neilh:

They'd go and find a company worth growing (probably not a FTSE100 or similar CEO position). Rather than work for low amounts of money at the helm of a behemoth. 

In reply to maybe_si:

Correct, however are they worth 4x as much than they were in the past as evidenced upthread?

The problem is short term incentives. My employer has made a few people redundant when there is no decrease in workload, so definitely short term gain for long term pain.

In reply to Sayon:

The ideologically-driven, non-evidence-based introduction of academisation into primary and secondary education has done exactly this. It has created a completely unnecessary false market for leaders - too many of whom are only managers. This has fragmented the system at greatly inflated cost. No wonder schools are struggling for funding when the CEO of a tiny academy chain of five or six schools now earns the equivalent of an old Local Authority Director of Education who could have been responsible for a hundred or so. Anyone remotely acquainted with education will find the idea that this has somehow led to a significant rise in standards risible in the extreme. There was absolutely no need for this change and no indication whatsoever that it would lead to systemic improvement - nevertheless, it went ahead. No doubt the free marketeers clinging to their credo of competition drives up standards will continue in their magical thinking though.

In reply to neilh:

I know, I am just addressing the idea that people are not aspiring to these roles.

In reply to Andy Clarke:

In my experience, they could be earning significantly more than the Director of Education.

In reply to Toerag:

Exactly. I think that above a certain level compensation should be in the form of long term incentives such as locked shares.

You cannot foster a sound attitude to risk if people don’t have some form of skin in the game.

In reply to Alyson30:

Spot on, if targets/bonuses are short-term then behaviours will adapt to fulfil those.

If targets/bonuses are long-term then behaviours will change towards long-term thinking/planning/actions, etc.

I've no problem with CEOs getting huge bonuses as long as they're properly performance linked to worthwhile targets rather than short-term rubbish. Locked shares - as you mention - are one way do this.

In reply to The New NickB:

Sadly, all too true. What a cock-up/carve-up. It still saddens me that Andrew Adonis was the driving force behind the initiative, a man I admired in the idealism of those early Blair years. I once entertained his wife in my office, proselytising about how all schools should be empowered to embrace the international dimension and make links across the globe. Christ, that was a different age.

In reply to Michael Hood:

All depends on what you are seeking to achieve with the Executive. In some cases a short term package may be the best solution. Especially if you are trying to turn around a company. 

In reply to neilh:

This is all too true.

At the end of the day, its a market much like footballers and their silly wages.  Many footballers are purchased and dont make a contribution.  Some hardly play a game.  Is it the footballer's fault that they get paid what they do?  No, it's the TV rights and agents being aware of the slush fund behind football that pushes up the salaries and the desperate need to stay in or join a league, depending on your position.  There's also the merchandising behind this so footballers, especially the very top, attract huge sales in tops and junk.  But in truth most premier league footballers are pretty average in most ways against each other for the salaries they achieve.  

CEOs in many ways aren't much different.  They are heavily courted by agents/headhunters, a desire in their candidacy is created by those headhunters. They promise the huge improvements and its on a flashy business plan and many presentations that they are hired and their salaries are signed off by the board, who answer to their shareholders.  Like fans, shareholders want the perceived best. Many hardly make a contribution and move on, some make a huge difference to shareholder value and bottom line (like the very top footballers increasing merchandise and changing games) but most are just average against each other (I stress 'each other' in the same way that I use it in the footy analogy above - top CEOs like top footballers are special against the mere mortal but average against one another - the top one's really stand out though, but all get well paid, like most of the premiership footballers, regardless of their contribution).

But ultimately, footballers arent at fault for receiving the money they do, like CEOs aren't.  They are paid what their boards/managers approve, and who would turn down a fat paycheck.  If I could make millions doing either, I would do.  I just dont have the talent.

In reply to TheDrunkenBakers:

Footballers operate in a far more efficient market. Their performance can be measured and quantified in terms of goals, saves, assists, matches played etc by a club on the other side of the world.

In reply to Offwidth:

Its interesting hearing peoples reactions to this.  I work in executive level recruitment and we hold seminars, discussions, and have released reports all based on executive remuneration.

Essentially it's a slightly bizarre world and each case has to be taken on its own merit.  There are times where a short term incentive is appropriate, there are times where a long term incentive is appropriate. 

There will always be extreme outlier examples that the media latch on to, unfortunately the masses then see this as the norm!

The vast majority of packages will involve a complex structure of base salary, bonus, LTIP, etc.  Its usually a successful LTIP that catches the media's attention - £180M Persimmon for example.  

Ultimately in any business there is a hierarchy, someone will always earn the most.  It does come down to supply and demand, if you want to best, most highly driven business minds then you have to pay for them! 

In reply to elsewhere:

I would argue a more interesting and visible  market but no less  measurable. Increased revenue, new product introductions, costs saved, new markets penetrated etc etc...

More latterly, improved market image, enhanced employee mobility, better social responsibility, improved union relations, enhanced green agenda... and so on.

In reply to mondite:

Name a continually poor performing CEO who is tolerated by their shareholders? 

In reply to TheDrunkenBakers:

Often far easier to fudge than goals scored and not clear how much is due to CEO.

In reply to neilh:

A close relative of mine worked as a turn around man, first for many years directly employed by Barclays trying to limit their own loses through business customers crashing, then he went independent. 1-5 years was the range , usually 1-2 as they were either saved or beyond repair by year 2.  

In reply to summo:

All the CEOs of companies that are currently on life support from the state.

In reply to Alyson30:

So they don't accept the life support and thousands of people lose their jobs....

In reply to maybe_si:

Not the point.

My point is that there would be a loooooong list of CEOs losing their jobs and their big pay packets if it wasn’t for the taxpayer coming in to save their arse every time the economy goes down the drain, because they have failed to build any kind of resilience in the business.

In reply to Alyson30:

Why would any CEO turn it down. A couple have but very very few. They are employed to run a company, make a profit. If they fail at that, they'll be forced to walk. 

You still haven't listed any failing ceos allowed to stay in post. The only other job where failure is tolerated even less would be football managers. Most ceos at least reach the end of the financial year, even after a profit warning. 

In reply to Alyson30:

You could argue with the just in term logistics, customers expecting everything immediately, race to the bottom pricing... the public gets the industry it indirectly creates. 

Ps. There are 1000s of company bosses whose businesses have resilience. Some post on here. They have cash reserves, good staff management plans, they've taken a personal hit these past 6months to save their staff etc etc. Only the horror stories make good media though. 

Pps the ceos didn't start covid and don't set the new covid laws. 

In reply to elsewhere:

Nonsense. Those goals are very measurable and can be easily scrutinised. The culture of a business can be hugely affected by the CEO and the investments, initiatives and direction will all be set or signed off by the CEO.

In reply to summo:

 

Nobody says they should turn it down stop making things up.

I am simply pointing out that a lot of businesses where executives have been rewarded handsomely for years on the back of good performance are now sucking at the tit of the taxpayer for support.

So there is an asymmetry here, they get huge reward for small gains, but no downside for massive loss that erases all of the gains.

That is quite different from entrepreneurship in a proper capitalist free market system.

In such a system someone who spent maybe 10 years of their life building a business can lose everything overnight if they fail. That is skin in the game.
That’s the way it should be.

In reply to TheDrunkenBakers:

What history is there of the goal scoring record of a football player being fudged in the same way as Enron's record was fudged?

In one case a guy blows a whistle and the whole world knows the result, in the other a multinational team of accountants might or might not unravel the result years later.

In reply to elsewhere:

We are going a little off track here but you have used a very poor example. With Enron you are highlighting one particularly bad case study of culture permeating a business but you are proving my point. The point being that CEOs set the culture of the business which in that case was one of corruption, fraud and mismanagement. Those executives were prosecuted and some jailed for their crimes.

Footballers on the other hand intentionally try to change a game with a foul, dive, hand ball, pulled  shirt during the encounter which on many occasions throughout the season has a direct impact on the outcome. Sure, some are noticed, the whistle is blown and the players are penalised or booked. Many are not and even after the event, when the replay shows foul play, no further actions are taken. The refs aren't penalised either for missing key moments of foul play.

Enron on the other hand in the 'replay' was very much scrutinised and penalised. As was the referee in that game, Arthur Andersen (the auditor). The people concerned suffered severe penalties for their poor sportsmanship. Football teams rarely suffer post match retribution (points docked, for instance, which I fully support) for the actions of their bad actors.

In reply to TheDrunkenBakers:

It’s not about fraud. It’s about risk asymmetry.

Take for example the banking sector. In 2008 the banking sector lost more money in one year than it ever made in the entire history of banking.

So essentially the entire sector is over time loss-making and exists only because of taxpayer support. 
As such, shouldn’t banking executives be paid like civil servants ? 

In reply to TheDrunkenBakers:

Enron FC would be cheating to win the premiership despite me playing. It doesn't happen because football is far more transparent. It is a public performance.

If CEO performance is as transparent as football why did Warren Buffett say this?

Only when the tide goes out do you discover who's been swimming naked.

In reply to maybe_si:

Upto a point I agree with you. But also of these people are still only souped up employees and rarely have skin in the game if what they do is a failure ( other than of course it tarnishes their reputation and they cannot then get work elsewhere ).

And one of the earlier posts pointed out the Economist study on this which illustrates a solid counter view.

As regards the public sector it is a difficult comparsion.

In reply to Alyson30:

I would imagine top civil servants have pretty healthy packages and pensions as well.  Of course not as high as top bankers but nevertheless, we live in a capitalist market, like it or not, which for the most part benefits the majority.  This means that pay is governed by available talent, demand and perceived skills.  Surgeons are paid much more than teachers.  You could argue that surgeons have to be smarter, they train for much longer, they are of course in more demand and there a fewer of them.  You could also argue that without good teachers we would have no surgeons as they have to bring out the best in the future surgeons.  Teachers also train for a long time, and work very hard.  Do we reduce the salaries of the surgeons?  I dont think think so as I want the most talented person who wants to be a surgeon cutting me open if needed.  My personal view is that we should increase the salaries for teachers (and nurses, assistants etc) but we only have a finite financial resource.  I certainly wouldnt like to have to make those calls to balance the country's books.

Would you prefer Russia or China, or Venezuela?  They may be communist but lets not be daft in suggesting their communist arrangements benefits the majority.  Quite the opposite when you look at the social issues and deprivation in stark contrast to the elites, which is even worse when you consider their vast natural resources.  At least here in the UK we are not held back in the same way as you would be in most communist countries.  If we dont like our government we can at least vote them out, it just happens that the majority dont see that this government are not looking out for their interests.

Anyway, taking your asymmetry in to account.  You are correct that those bankers were hugely negligent.  There were a few bad actors who became so complacent and arrogant that they were prepared to bet the house on crumbling assets. There was insufficient liquidity and insufficient oversight, combined with a sense of untouchability.  But consider the wider picture. Most bankers, traders etc dont earn the sorts of money the top bankers do.  They do a job which required lots of training and a huge amount of responsibility.  Im sure you have a pension.  This pension is managed by fund managers who earn lots of money, sure, but they also look after your pension and without them skillfully managing yours and my assets, especially now, we wont have a pension to retire with. Like the surgeon example above, I would rather they get paid well and that they are the best when looking after something some important.

In reply to elsewhere:

We'll have to agree to disagree but nevertheless, and back to my original post, CEOs and footballers alike don't have control over their pay, and that if you or I could command such a salary would we decline it.  No we wouldnt.

In reply to TheDrunkenBakers:

You introduced footballers and their silly pay in topic of executive pay.

My point is that footballers have some of the least silly pay around. That's because that at the top level their performance is broadcast live and worldwide to be be judged by potential employers weekly. That is a far better informed market with far less information asymmetry* between buyer/seller than the CEO employment market.

*efficient markets & all that

In reply to summo:

Why are you demanding I answer a completely different question?

However as a random example Ginni Rometty although after 8 years has now shifted

In reply to elsewhere : I think footballers are excellent to compare against.  There are both CEO's and players who have negotiated very large payments, but then woefully underperform.  I thought it was well demonstrated that CEO pay did not link correlate well with performance, and one thing I find surprising is how rare shareholder r:ebellions are , though there are some sad reasons why that's the case,

Banking CEO's were clearly negligent as they didn't understand what their business was doing, and what the risks were.  

Comparing the current system to Venezuela is ridiculous, and makes it look llike you don't have a better argument.

  

In reply to TheDrunkenBakers:

CEOs have a lot more influence over their pay than footballers. It varies on the company but generally the CEO will have a lot of influence and control over the board who control the pay. Hiring of a footballer is about as close as you can get to the fantasy of an information symmetry transaction as well. Unlike a CEO.

You could go for an external company but then those companies generally want to be hired the next year so are unlikely to provide an answer which disagrees with the board and CEO. Obviously some exceptions eg when you have an activist large shareholder.

In reply to mondite:

The CEO might have 'some' control when in a business but they have the same level of control upfront as anyone else.  The negotiate based on their skills and suitability and of the desire of that company to hire that CEO.  They control nothing until they get in to a business and go through negotiations in the same way as anyone else does in that type of position.  They may be better negotiators that the average footballer and that's why agents are employed, similar to *headhunters.

*I was one of these recruiting senior execs so I have a little insight.

In reply to elsewhere:

Correct, as method of highlighting supply/demand in a scarce resource at the top of each profession.

Least silly pay?  Top footballers who earn more than most UK CEOs (FTSE 100/250 excluded) in a couple of weeks!

I gave numerous examples above of CEO accountability, scrutiny and possible KPIs and you gave me Enron, which not only disproved you point, it enhanced mine, and further helped with the footballing analogy.

In reply to TheDrunkenBakers:

No, no again you are missing the point, and not understanding my argument.

It’s not a problem of “bad actors”. It’s systemic. It isn’t an argument against the real value of their work either.

My argument is that the system is rigged. In your analogy with the footballers it would be the equivalent of the football league changing the score of the games after they have been played to favour some players over others. It’s a much, much bigger problem than individual players cheating.

There is a big, big difference between a surgeon and the CEO of a large bank.

There aren’t many really bad surgeons because they are being ejected by the system pretty quickly if they kill their patients. Surgeons have skin in the game.

However bank executive can very easily take too much tail risk. So as long as the risk doesn’t materialise, they produce higher returns,and therefore can ask for very high pay.  
When the risk they take materialise, wiping out their entire performance over decades, it’s too late because you can’t claw back the huge salaries they have been paid.

And that would be fine in a system where the executives who take too much risk are taken out of the pool by bankruptcy.

But that isn’t what happens, because instead we ask the taxpayer to save them. The same  applies to other sectors of the economy with Covid.

Don’t mistake my argument for an anti-capitalist, left-wing argument.

It is the contrary, the current system is not free-market capitalism, it is rigged corporatism sponsored by the state.

Make the system truly free-market and capitalist and I’ll be happy for senior executives of large companies to be paid gazillions. However if they are paid using my taxpayer money, or achieve their performance completely artificially with low interest rates and QE (essentially a tax on my savings), then I want to have a say.

In reply to Alyson30:

It is a specific issue for those in the banking sector.

For most others it is just not relevant as a long tail issue.

In reply to TheDrunkenBakers:

Less silly judged by efficient market hypothesis.

None of which is more transparent with less information asymmetry between buyer/seller than the market for football players. A CEO's KPIs may be fudged, a player's much less so. A CEO's contribution to the KPI is uncertain, a player's contribution to a goal much less so.

In reply to neilh:

No, it isn’t specific to banking, I’m just giving this example as that is the most obvious to understand.

But you can apply the same to a big chunk of the large corporates sector.

A large number of businesses would simply not have survived the recent economic crises if it wasn’t for taxpayers and savers picking up the bill to save the entire system from ruin every single time.

The problem is that no democracy wants to impose short term economic pain on its people, so they just save the system every time.

What we need is not to control executive pay, but instead simply stop economic interventionism. Return to proper free-market policy in which failure has consequences and that should take out the bad apples fairly naturally.
 

In reply to Alyson30:

Not sure that really stacks up even with the furlough scheme( which is the first time this has ever been used).

You only have for example to contrast Virgin and IAG.

Agree about economic interventionism, and there will be alot of zombie companys that fail. Also loads in retail and hospitiality, but all Covid has done is bring forward something faster.

I reckon its a mixed picture. And do you really want the likes of say Roll Royce to fail.Hardly a zombie company.

I am not sure any country practises a proper free market policy anywhere. Even China.

In reply to neilh:

The furlough scheme is just one aspect of it, generally speaking the massive injection of money by the state and the central bank is the problem.

I don’t want them to fail, but they should be allowed to fail if they do.

It’s called creative destruction. It is the failure of bad business, bad managers, or bad products that allows new businesses, managers and product to appear.

 

Sure, but in the past two decades we’ve accelerated interventionism to the point where the system is completely rigged.
 

In reply to Offwidth:

Shorely it stands to Reason that the Executive Pay of the Ayanda board can only be a tiny token fraction of what they really are entitled to be paid by taxpayers?

In reply to Alyson30:

The difference I think at present is that businesses have had lock down forced on them preventing them operating. They have no choice in the current market conditions and if a government wants to have them as employers still in the autumn they need to support them. 

In reply to Alyson30:

Well its a wider issue than purely in the UK over the last 20 years.

It is endemic globally.

About the only  sector which is closest to capitalist model is the SME one in most cases.Even then there are exceptions.

In reply to summo:

And I would argue that we would be better off with all those bars and restaurants shutting down, if people can’t or won’t go spend their money in them.

The one that survive will be the ones that have either been the most resilient, or have shown the best ability to adapt to a new environment. 

What do we do instead ? Furlough schemes and meal vouchers... basically the taxpayer is paying for the survival of businesses that have become irrelevant.
 

In reply to neilh:

I completely agree.

Yes that is right SME are much, much better. But the economy is more and more dominated by large corporations, which again is the result of constantly propping them up.

In reply to Alyson30:

But they are only irrelevant during lockdown, which was pretty hard to predict no matter how well you plan, and which hopefully will be transient.  If they have no revenue and inescapable fixed costs, what are they supposed to do?

You take a pretty Thatcherite line, and not one that the current bleeding heart wets will follow! 

In reply to Alyson30:

I'll agree only those that are relevant in a new covid world and also considering climate change should be saved, but the cost of funding mass unemployment will be higher than saving many business. 

Opening bars before schools etc was pretty stupid overall. Folk just have to accept they can't socialise this year so much, that's life, it's hardly essential. 

In reply to Dave Garnett:

Places like Byron Burgers and others were pretty borderline cases before Lockdown. they have been given a few months breathing space before the inevitable happens.

Yep you force people to retrain and move to the areas where there are longterm jobs. There are alot of talented people in those sectors who could do more resiliant and better paid jobs in the long term.

its going to be tough though.

In reply to Alyson30:

Still something like 50% of employees in the private sector are in SME's.

In reply to Dave Garnett:

You don’t need to predict when the next pandemic is going to hit.

If your business is agile, adaptable, resilient, and without too many single points of failure then you just adapt to whatever the future throws at you.

If your business relies on predicting the future then you are doing something wrong. 

And that is part of the issue you see, we highly reward CEOs who are fixated on optimising the business in order to increase returns. It looks good when all is jolly, and you create very large super-efficient companies through economies of scale, and pay these “super stars” gazillions

But when something unpredictable happens they are unable to adapt. Normally, at that point the business fails and better alternatives can rise up. 
 

Well Thatcher had the right idea with the wrong motivation and the wrong implementation.

In reply to neilh:

Yes. It’s far too little.

In reply to Alyson30:

Resilience is the key, most of the people I know who run businesses push to expand as fast as possible, pull out as much money as possible and run the company or companies as a house of cards.

I don't do that, I like to keep between 1/3rd of my turnover as a cash reserve, its my oh shit fund. 

I still Furloughed most of my people due to a downturn in work and the uncertainty of the virus, working in a key industry I wanted only the bare minimum of us in that way if we got ill we could bring other people in to carry on helping the water and food to get where it needs to be.

Rather than make people redundant I'm expanding my workforce by 9.1% on the 1st of September (9.1% sounds better than 1 more service engineer) . I don't have enough work for him to do but looking to the future I will. 

I have said this before and I will bring it back, in my opinion there should be some rule / law that says a business should have x amount of money in reserve before bonuses and dividends are paid. 

All that said though I don't think I know squat because I certainly don't earn 100x more than my employees, hell I don't even earn 2x what my employees earn but I did expand our outfit 50% during the last recession and I intend to do similar this time. 

In reply to Dax H:

Exactly. And good to hear there are still people out there with common sense. If you study business management these days they will tell you that not only you shouldn’t have a minimum cash reserves but you should be leveraged....

In reply to Dax H:

The only issue with that is tying cash up which might be better used elsewhere. 
 

And in larger companies who can access other forms of equity  I reckon it would be too restrictive. 
 

And the taxman does not like you hanging onto excessive cash. 
 

It is a tricky balance. 

In reply to neilh:

I know all the arguments, you say better used elsewhere but I think the best use is making sure I have enough money to keep the lights on and pay the bills including wages when times are hard. Covid 19 has barely caused a blip in my overall finances despite a 90% down turn for a few months. 

My employees love my financial planning too because those that were on Furlough got 100% of their wage and the one guy that stayed in with me to look after our critical customers found a slight anomaly on his wage slip when I brought everyone back to work. He found that I had accidentally paid him 3 times for 1 months work. 

Look after the employees and they look after you. 

In reply to Alyson30:.

What do you do that's so agile, adaptable and resilient?  Don't get me wrong, I'm a big fan of SMEs and have worked in several, but it's not the only business model that works.  I work in a huge company that is still pretty adaptable.  We've had double digit growth this quarter (and not from a small number either).  Admittedly, it's biotech and diagnostics, not aerospace.

In reply to Dave Garnett:

A good economy needs a good mix that covers everything from a 1 man band up to a massive corporation employing thousands of people. Everyone had their part to play. 

In reply to Dax H:

There's this huge misconception that being a decent human being is incompatible with being a decent business man. Hats off to you.

This. All Day Long.

In reply to Alyson30:

I've found myself agreeing with at least 90% of what you've posted on this thread. I'm going to have a lie down in a darkened room now.

I may be some time.

In reply to Dax H:

There comes a point when you can have too much cash sitting there over and above what we both might call resilience planning. 
 

At some point it just tips over into being excessive. It is finding the balance which is hard. 
 

I am in the same position as you , but I realise you can go over the top. 
 

what’s the saying “poor owner , rich business  or vice versa”.

In reply to neilh:

I find it interesting that although modern business management practices would consider holding on to too much cash bad, some of the best companies in the world like Google or Apple are sitting on hundreds of billions of cash.

I think the difference is that these companies play the long term game. Their strategic horizon is measured in decades. They expect to still be there a 100 years from now. 

Apple with their 250bn of cash can basically reshape the entire business if they need to, or pivot with acquisitions in the blink of an eye if the situation demands it.

And tu be fair; this is absolutely fine for many businesses to not have such ambition and the economy also need businesses that are « hyper optimised » and more short and medium term focused.

But in this case we must accept that they can fail, and that’s ok.

In reply to Alyson30:

But they are the exceptions and if you are digital/software. then that can work. You could argue that with so much cash they should return it to the shareholders. and not sit on it.But if you need factories etc and physical investment then it does not work.You can off course do a Musk and invest your gains in rockets or cars.Even Amazon does not own its warehouses, it leases them.

Economies need a mix as you say.

In reply to neilh:

 

You can do what you want, return everything to shareholder or invest it, the only point is that when things go bad and you don’t have enough cash on hand to operate, because you have prioritised returns and growth over resilience, you shouldn’t be given any bailout or state aid of any form.

In reply to neilh:

That's easy to deal with, I class having more that half my turnover in cash reserve to be too much so if nothing is needed for the business we divvy up the extra, split it in to 4 1/4s. The 3 directors take 1/4 each and the employees get 1/4 divided equally between them.

This may not seem fair to some but we directors are the ones that have our houses on the line and invested all our money to get started and take all the stress and work silly hours. Plus it was about 13 years ago that it last happened. Rule is no one gets a bonus unless everyone can get a bonus. 

In reply to Alyson30:

I’m quite comfortable with the principle that only the fit should survive. However, in the instance of a forced hibernation of the economy, the impact on the lives of millions of workers who would lose their job in the absence of government support for their employers, with the near certainty that no replacement employment would be available, perhaps for years, is unconscionable in a responsible society.

In reply to BnB:

 

Apparently only in theory but not in practice.

There is nothing preventing us from financially supporting people directly through unemployment. We used to have a welfare system.

Moreover your argument fails to incorporate the fact that a functioning economy can adapt very quickly through mechanisms of supply response. There are still plenty of needs that need to be satisfied they are just different.
This implies the destruction of some business and the creation of new ones.

Much better than keeping people in dead-end of fake jobs for the only purpose of keeping businesses that shouldn't exist alive, making each crisis worse than the previous one.

 

In reply to Alyson30:

Creative destruction is all very well, but if, say, Rolls-Royce collapses, those orders don’t then move to an insurgent new aerospace business down the road, they go overseas to Honeywell or Safran or GE. Then you’ve no employment for the ejected workforce to return to. A more practical and morally justifiable  approach is to extract a price for government support, be that in the form of equity, convertible securities, higher corporate taxes etc.

In reply to BnB:  I'm in favour of a universal basic income.  In fact I think it's going to be come a neccsessity for a modern consumer based society that can function well without an uncderclass as inequality grows.

But, re. supporting businesses , shouldn't tihs be selective?  You can make strong arguments that after the last great recession 2008 ( not very great in reality, in retrospect) there was much less unemployment in the US compared to the UK, but UK economic bounceback has been very slow compared to others, and the UK has ended up with a stagnant economy with zombie businesses?

Also you've got the shock of Brexit coming along in a few months - do you want to prop up a business that's going to fail then anyway...?

In reply to wbo2:

As far as I’m aware, the government has been selective in its support. The guidelines for the COVID Corporate Financial Facility come with a series of requirements not least of which is an investment grade credit rating, which is not a characteristic of a zombie company.

https://www.bankofengland.co.uk/markets/covid-corporate-financing-facility

Zombie businesses are a feature of all developed markets (see US shale producers) rather than a UK phenomenon. The UK’s real problem, amply demonstrated in the mix of the FTSE100, is the strong preponderance of old economy businesses like banks, and miners. Compare Amazon and Microsoft, or China’s mighty Alibaba and Tencent, to our low growth, old tech HSBC, Shell and Unilever.
 

In the whole FTSE100 there are fewer than 10 companies that I consider investible, on the basis that the remainder are in industries that are in structural decline, contravene ESG principles, or are being dis-intermediated by technology. Yet you would not describe many of the constituents as a zombie firm. They remain profitable but are just offering low growth.

 

In reply to Offwidth:

And on the topic of executive pay, I care much more about the wage of an average staff member than I do about the CEO’s salary.

This isn’t just liberal conscience-salving, high wages right across an organisation are a strong indication of the business’ quality, its position in attractive markets, and a heavy reliance on intellectual property and human capital. All of which are, to an investor, the hallmarks of a high quality investment (at the right price).

If the UK’s largest firms score poorly on the ratio of executive pay to average employee remuneration, then it is indicative of their structurally challenged market presence as much as the self-serving nature of board remuneration.

In reply to Philb1950:

They can’t delegate all the decisions. 
 

I await the first prosecution and prison sentence for failing to ensure a COVID safe workplace...

And I await someone to put themselves in that position for £100k pa. 

In reply to BnB:

What is the problem with that ?

 

I am certain that Rolls Royce engineers would have no difficulty either creating their own jobs or finding new ones.
If Rolls Royce goes bankrupt the skills and knowledge of the Rolls Royce employees doesn’t disappear.

I find it interesting, how, when suddenly faced with losing their investments, so-called « capitalists » suddenly find themselves advocating socialist policies.

In reply to Alyson30:

That is correct, but this is not an environment in which demand for their services, nor job opportunities prevail.

I pre-empt the issue by trying not to invest in compromised businesses* in the first place. In fact, I tend not to invest in businesses that have any debt whatsoever and across my portfolio the average level of debt is negative, ie cash positive. That unclouds the issue and frees me to worry about the broader workforce and the government’s support for them without attachment to economic dogma.

Although we are debating, I don’t think your concept of a quality business is any different from mine. I recall us discussing the matter and your admiration for Ferrari.

* I do have a share in Informa, the exhibitions organiser, which is an exceptionally high-quality company by any normal measures, sadly severely affected by the ban on travel. I failed to comprehend the full ramifications of the pandemic in time to switch out before the price crashed and it remains 40% in the red. You might have read in the FT this morning that a number of its competitors have gone to the wall in an example of your beloved destruction, and from which Informa, well capitalised and the dominant force in the market, may eventually prosper. 

In reply to Alyson30:

Self interest trumps ideological purity, you'd think a capitalist would understand that.

In reply to BnB:

I’m not so sure as to why.

There is plenty of demand in engineering talents all over the place, no shortage of engineering problems to solve, and no shortage of capital to invest.

In reply to Alyson30:

Yes Rom, if you say so. The 9,000 fired by Rolls can join forces with the 10,000 sacked by BP and the 1,700 made redundant at Airbus and the thousands ejected from the car industry. Even Accenture is cutting 10% of its workforce.

https://www.cityam.com/hollowed-out-which-uk-companies-have-made-job-cuts-d...

Cut the ideological purity and think about people’s lives for a moment.

In reply to Alyson30:

Yep, but the majority of the jobs going at Rolls are highly specialised “bolt item A to item B” assembly line type jobs. These aren’t going to be replaced in a hurry (at all?) because The numbers of relatively high paid blue collar manufacturing jobs have seen a 50 year descent trajectory steeper than a faulty Boeing 737.

Globalisation combined with the free flow of international capital has meant we can buy loads of stuff really, really cheaply. It’s also been a death sentence for Western blue collar workers with middle class wages.

In reply to Stichtplate:

I doubt many of the jobs at Rolls Royce are « bolt item A to item B » type.

But assuming that is the case, it’s not a good thing for a workforce to be so specialised. Being adaptable is key, and people are a lot more adaptable than technocrats give them credit for.

Surely you must have noticed that the age of globalisation is over. The one thing that’s going to raise wages is increased productivity and you’re not going to get that by artificially keeping people in « bolt item A to item B » jobs.

In reply to BnB:

So what ? You are going to keep people making cars or planes when people don’t want to buy cars or planes ?

What is wrong with being adaptable and just do something else ? There are plenty of needs to be addressed. The job of an economy is to serve our needs, not the reverse.

It isn’t about ideological purity. It’s pragmatic. Unless we’re willing to bite the bullet we are going to continue from crisis to crisis, each one bigger and more destructive than the previous one.

You try to make it look as if I was insensitive to the plight of those laid off. It’s disingenuous because I’ve already pointed out that I have nothing against welfare payments directly to individuals, which can be done at a fraction of the price of what we are laying to keep failing businesses with no future afloat.