Welcome back. Denise Coates, the founder and chief executive of UK-based gambling company Bet365, has been in the news this week after earning an eye-popping annual salary of £221mn ($281mn) in the last financial year.
To some, this payout will look obscene — particularly since it is funded by the losses of gamblers, whose habit can have severe consequences for them and their families.
Coates’ defenders will point out that, as the majority owner of Bet365, she has made a deliberate decision to receive the bulk of her income from the unlisted company through straightforward salary payments — thereby exposing herself to a hefty tax bill that she could have lightened through a more elaborate payout structure.
As I write below, this contrasts with a trend towards increasingly complex pay packages for the chiefs of big European companies. Also today, we have the latest on an important initiative to boost liquidity in emerging market sovereign bonds. See you on Friday.
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The pitfalls of complicated CEO pay structure
With chief executive remuneration at big international companies now well into the stratosphere, boards are under pressure to ensure these lavish pay packages are aligned with corporate performance.
Many have been designing increasingly complex pay structures for their chief executives, whose income is partly linked to a growing number of “key performance indicators” (KPIs) — which often include environmental, social and governance-linked goals.
But excessively convoluted pay systems can be damaging to companies, warns Xavier Baeten, who heads the Executive Remuneration Research Centre at Belgium’s Vlerick Business School.
Baeten leads an annual study of executive pay at constituents of the Stoxx 600 index of big European companies. As well as comparing the total sums paid out, Baeten’s team devised a system to measure “pay complexity” — using factors such as the number of components in a remuneration package, the number of KPIs set, and the holding period before executives could profit from stock awards.
Using a model to compare companies with their peers, taking performance into account, Baeten’s team found that chief executives were more likely to be “overpaid” for mediocre outcomes at companies with more complex pay systems. And perhaps most troublingly for investors, Baeten said there was a “significant and substantial” negative correlation between companies’ pay complexity and their return on assets over a three-year period.
The latest edition of the study, covering payouts in the 2022 financial year, shows that big UK companies have much more complicated pay structures than their European peers, and that this complexity has increased substantially over the past decade or so. But pay complexity at non-UK Stoxx 600 companies has been on the rise too, now exceeding levels seen in the UK before 2017.
Part of the explanation lies with a long-term shift towards CEOs getting most of their pay through bonuses. Short- and long-term incentive plan payouts together amounted to 350 per cent of salary for the median chief executive at UK Stoxx 600 constituents in 2022. The median figure was 248 per cent for the Stoxx 600 as a whole.
Another factor has been the growing adoption of ESG-linked pay awards — which have faced criticism that they are too easily attained, and could amount to yet another means of overpaying executives. Baeten says the research suggests that these awards can help to boost companies’ ESG performance — but only when they are smartly, sparingly designed, with challenging targets and a clear focus on real priority areas.
In the worst case, Baeten warned, convoluted pay systems can serve as a kind of “camouflage”, confusing stakeholders and potentially board directors themselves. “That’s dangerous,” he said.
Rewiring the incentives to invest in Africa
As an adviser to the Bank for International Settlements, the Cameroon-born economist Vera Songwe has an inside view of the rules that underpin the global financial system. They can come with some unwelcome side-effects, she worries.
The BIS’s capital adequacy rules require banks to hold more capital against less liquid assets — a system seen as crucial to financial stability. But it can mean, Songwe told me, that institutions are “penalised” for extending credit to nations with less developed capital markets, notably in Africa — something that restricts investment in those nations, and pushes up the cost of whatever finance they are able to access.
Tackling this problem is the mission of the Liquidity and Sustainability Facility, set up in 2022 with Songwe as chair, and with financial backing from the African Export-Import Bank. The LSF aims to kick-start a “repo market” for African sovereign bonds, as exists at multitrillion-dollar scale for securities issued by wealthier economies.
The idea is that financial institutions can sell bonds to the LSF, with an agreement to repurchase them later at a somewhat higher price. In effect, the LSF is lending them money, using the bonds as collateral.
In late 2022 we covered the LSF’s first transaction, in which Citi borrowed against $100mn of African sovereign bonds. During last month’s COP28 summit in the United Arab Emirates, the Abu Dhabi Investment Authority — one of the world’s largest sovereign wealth funds — agreed its own $100mn repo deal with the LSF. A third potential deal, with South Africa’s Standard Bank, is in the works, Songwe told me.
Songwe said she was pleased with this young institution’s pace of progress. But it will take a far greater scale of activity to make a meaningful impact on the African sovereign bond market. The LSF is seeking additional capital, including from Japanese and Singaporean pension funds.
It’s also planning to expand its sphere of operations to bonds issued by developing nations in Asia and Latin America. Rather than detract from the LSF’s core work in Africa, Songwe argues, this will help it to gain scale and momentum.
Songwe has also lent her support to a push for a debt service suspension initiative for low-income nations this year, as was previously provided during the Covid-19 pandemic. But as well as short-term responses to debt crises, governments and the financial sector need to give more thought to the structural factors behind them, Songwe says.
“Not enough attention is being paid to why we have the debt issues — and one of the big reasons for that is the cost of financing,” she said.
Smart reads
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