FT Alphaville " The iPay phenomenon A British academic, Ian Tonks of Bath university, suffered a viscious TED attack this week regarding this post - a summary of Tonks" research into links between bankers" bonuses and the financial crisis. Tonks finds that there is (to him) a surprisingly weak link between executive pay and performance across all industries, not just banks. In other words, bankers high pay doesn't actually appear to be linked to performance. However, he thinks politicians should go ahead and reform executive remuneration in any case because bonuses should be fully transparent and the various corporate governance initiatives in the UK have so far failed to stem the dramatic increase in executive rewards. The Epicurean response? Tonks is plain wrong to simply equate "share price performance" with'company performance" (..."a common failing of many real and pseudo-academic (i.e., consulting firm) approaches..."). And Tonks is also missing the story by focusing on boardroom pay at banks, in the process missing the lion's share of actual compensation that goes out the door in TED's industry. Thus: And this is where I part ways with our dear Herr Professor Doktor regarding his conclusion. If I have correctly identified his study's methodological weaknesses, not only has he measured the wrong independent variable, but he failed to apply it to the entire set of relevant dependent variables. He doesn't collect the proper financial performance data - the gross revenue and gross profit metrics upon which investment bankers are paid in the real world - and he doesn't correlate it against the revenue-producing employees who are producing them. Based upon how my industry actually conducts business and pays its employees, he hasn't proved anything. He hopes that one day some academic will actually make an effort to understand how the financial industry works before designing a study to explain it. In fact, both TED and Tonks might do well to start outside the finance industry to explain why executive pay has rocketed over the past 15 years or so. They should have a look at Silicon Valley and stories like this on Tuesday from Bloomberg: Apple Inc Chief Executive Officer Tim Cook will receive compensation for 2011 worth $378 million, boosted by restricted stock awards that are payable over the coming decade. The total includes $376.2 million in shares that will vest starting in five years, Cupertino, California-based Apple said yesterday in a proxy filing to shareholders. Cook's base salary was $900,000 in 2011... The story is actually a re-heat. Apple had previously announced that Cook had trousered 1m restricted shares in August last year and if you multiply Apple's share price by 1m you get a really big number on any day of the week. But the point is about why Apple has felt it had to lock Cook in with such jewel-encrusted handcuffs. The simple fact is that someone with his skills and experience, in his industry, could make umpteen million with any half-baked tech start-up of his own. Rather than faffing around with total compensation/EPS charts and the like, those looking into the true causes of the remuneration explosion need to go back to the early days of the dot.comedy, when suitable human capital suddenly appeared much scarcer than the monetary kind. Able executives discovered they were able to bank extraordinary awards by simply pulling a few programmers together, securing a bit of venture capital and then floating whatever vapourware they might have produced on NASDAQ. At the time, people like Jim Clarke were busy demonstrating how to make billion dollar companies two or three times over. It was that initial display which fed the executive pay frenzy and it spread across all sectors, not just finance. Will Cook's extraordinary rewards provoke a backlash against Apple products amongst the OWS crowd? Doubt it. Apple execs are now the equivalent of rock stars... Related links: The Root of Some Evil - The Epicurean Dealmaker Bankers" bonuses and the financial crisis - VOX This entry was posted by Paul Murphy on Tuesday, January 10th, 2012 at 10:17 and is filed under Capital markets. Tagged with apple, bonuses, executive pay, Jim Clark, Tim Cook.