From Mr Jon Moynihan OBE
Sir
Peter Gibby (Letters, June 18) attacks Terry Smith's article promoting a low base/uncapped high bonus model for executive pay. Mr Gibby asserts that such an approach leads to Enron-type disasters.
For many years PA Consulting Group has conducted and published a survey on companies' different approaches around the world to creating shareholder value. We ask major companies some 50 questions and correlate their responses with their shareholder returns. Across a dozen OECD countries, one particular approach has been shown to correlate more than any other with superior shareholders returns: this is the low base salary/high uncapped bonus approach advocated by Terry Smith. The additional returns achieved by companies adopting this approach are enormous. So, precisely the opposite of Enron.
The difference in returns between the companies who do and don't adopt this approach is, by the way, large enough to explain all of the difference in return between private equity over publicly traded companies.
Unfortunately, the percentage of companies who espouse this approach remains flat over the years: only about 10 per cent of public companies ever adopt such an approach.
Publicly traded company executives are in the main content to remain with the high base/low bonus paradigm that rewards incumbency more than success.
Until that changes, one can expect the private equity approach, which better focuses on rewards for results, to continue to deliver returns superior to those of publicly traded companies.
Jon Moynihan
Chairman
PA Consulting Group
London SW1W 9SR
