Yahoo Finance Housebuilders’ bosses get too much credit for home runs
In Moneyball, the 2011 film of Michael Lewis’s book about using analytics to acquire players for the unfashionable Oakland Athletics baseball team, the side’s general manager, Billy Beane, is educated on the sport by a (fictional) geek just out of Yale.
“The Boston Red Sox see Johnny Damon and they see a star who’s worth $7.5m a year,” Beane is told by his young teacher. “When I see Johnny Damon, what I see is an imperfect understanding of where runs come from. The guy’s got a great glove. He’s a decent leadoff hitter. He can steal bases. But is he worth the $7.5m a year that the Boston Red Sox are paying him? No. No. Baseball thinking is medieval. They are asking all the wrong questions”.
The premise – that certain players are overvalued and that much cheaper ones can perform just as well (or better) – proved to be pretty smart. Despite Oakland’s low budget, the team got to the playoffs in 2002 and 2003, and the principles of “moneyball” entered the baseball mainstream.
The same approach has even been adopted across a range of other sports. Yet, strangely, the concept that organisations might be overpaying for executives imbued with the myth of stardom has yet to achieve much of a following in City boardrooms.
Yes: the topic of extortionate executive pay is back in the news, because it’s housebuilders’ reporting season.
Taylor Wimpey and Persimmon announce results this week, which is sure to mean another airing of the case of Persimmon boss Jeff Fairburn, who was initially offered a pay packet north of £100m. To some that was “obscene”, but to Fairburn it was “in line with accepted practice”.
Plenty of chief executives assume they are members of an exclusive breed. Like the baseball scouts, they are wrong
If you thought that was a rather ridiculous position to take, it looked even more so when chairman Nicholas Wrigley, plus the chair of Persimmon’s remuneration committee, Jonathan Davie, both quit over the scandal. Fairburn belatedly said he would give some of his wedge to charity, and then last week Persimmon said it would reduce the payout to a mere £75m.
In truth, Fairburn merely represents just one of the more egregious cases in the field: plenty of chief executives assume they are members of an exclusive breed, whose few members are the only ones brilliant enough to run companies. Like the baseball scouts, they are wrong.
In reality, the crucial work in major businesses is done by thousands of people. Sure, leadership is important, but as Stefan Stern, director of the High Pay Centre, has argued: “Share prices move about for a lot of reasons, very few of which can be traced back to the individual actions of a single person, whatever their level in the organisation. Big decisions are rarely taken by a chief executive on his or her own. Yet this is the bogus premise on which executive pay packages are constructed. Adherents to this mythology refer to it as ‘performance-related pay’. But it is no such thing: it is mostly luck-related pay.”
Nowhere do pay packets appear more fortunate than in the housebuilding sector, which has a reputation for constructing packages paying millions if the boss merely manages to remain in post while the market goes from bust to boom.
If you want to give one person the credit for the sector’s recent good run, then praise former chancellor George Osborne, who came up with the help-to-buy scheme that buoyed housebuilders’ shares (Persimmon’s in particular). That rise certainly wasn’t down to £100m of brilliance from Fairburn, a man who counts Smokey and the Bandit among his favourite films. He should try Moneyball.
