Does £70.4 million (€84 million) a year qualify as a "superstar salary"? Not according to Sir John Hood, chair of advertising giant WPP's pay committee. He last week told British MPs that WPP chief executive Sir Martin Sorrell did not have a "superstar salary" but one "that is in the range of other chief executives in the UK".
Really? Sorrell has received £190 million from WPP since 2009. His 2015 pay package was one of the biggest pay deals in UK corporate history. If that’s not a “superstar salary”, what is?
Sorrell’s case is extreme, although executive pay in general defies common sense. Newton Investment Management’s Helena Morrissey last week noted that the FTSE had barely budged over the last 18 years but executive pay had more than trebled, suggesting a “lack of alignment”.
Executives should not be blamed for the FTSE’s secular bear market, just as they shouldn’t get the credit during a bull market, but shareholders are right to ask if they are getting value for money.
Research suggests no link between corporate pay and performance, with companies all too often rewarding executives for luck, rather than skill. Indeed, some studies suggest financial incentives weaken rather than strengthen corporate performance.
Institutional investors’ tolerance appears to be waning. This year has seen many shareholder rebellions. Early in 2016, Norway’s €750 billion sovereign wealth fund warned it was cracking down on corporate pay packages. Last week, similarly threatening noises were made by BlackRock, the world’s biggest investor.
There’s little merit to the idea of the superstar chief executive, so why pay superstar salaries?
Markets right to shrug off Italian crisis
Are markets becoming immune to political crises? There had been warnings that a No vote in the recent Italian referendum could trigger Brexit-like panic but it turned out to be a non-event.
"After Brexit, it took three days for markets to shake it off," one trader told Bloomberg last week. "With Trump it took three hours; with Italy it took three minutes."
There is a certain truth to this, in that markets are increasingly primed to see politically induced selloffs as buying opportunities but comparing the Italian result to Brexit and Trump is misguided.
First, unlike the UK and US votes, the Italian result was widely expected. Second, investors recognised that political upheaval was to be expected in Italy, which has had 64 governments since the second World War.
As Barclays' William Hobbs pointed out last week, the Italian result should not be assumed to be a vote against the euro or "shoehorned into the 'anti-globalisation/liberal consensus' narrative". Note that the Economist – not exactly a hotbed of political populism – had called for a No vote.
Italy's Five Star Movement is advocating a referendum on EU membership. However, holding a referendum on international treaties would require electoral victory for the party, a stable parliamentary backdrop and a change in the constitution – which are "tactically insurmountable barriers", says Barclays.
Investors’ sanguine reaction was appropriate. Focus on the global economy, says Barclays, “rather than the various political forces vying to preside over it”.
Chasing the market higher
Three weeks ago, investors were celebrating the Dow breaching the 19,000 level for the first time. The grind higher has continued, so much so that Dow 20,000 is already coming into view.
Optimism has hit extreme levels, according to CNN’s Fear and Greed index. Investors’ Intelligence weekly survey of newsletter writers shows bullishness is at 17-month highs. Active managers appear almost fully exposed to equities, with the National Association of Active Investment Managers (NAAIM) Exposure Index recently registering one of the highest readings in the survey’s 10-year history.
Last week, the S&P 500 was 4.2 per cent above its 125-day moving average, the highest reading in two years. A quarter of stocks hit 52-week highs, the highest reading since December 2014.
Overbought markets can obviously continue to gain, but the odds of a pullback increase in exuberant environments. Chasing the market higher is not without short-term risk.
Expect exuberance in 2017
The aforementioned sentiment backdrop is a near-term concern, “but by no means are we seeing the over-the-top type of euphoria seen at major peaks”, said LPL Research last week. Stocktake agrees any retreat is likely to be brief, with markets increasingly positioned for a 2017 melt-up.
Some of history’s worst recessions had been preceded by private sector excess, Barclays noted last week. The “end of the cycle is still not imminent”, but “cyclical warning lights” may well “flash amber in the year ahead”.
After seven years of expansion, the US is essentially at full employment and wages are rising. Tax cuts, deficit spending and deregulation at this stage could trigger another bout of “private sector hubris”.
For now, that hubris remains absent, but the scene is set for a classic late-stage bull market melt-up. There may be, says Barclays, “a little bit of exuberance ahead”.
