Fintan O’Toole: Michael O’Leary’s golden ticket is for a ride to nowhere
Revolt against staggering bonus shows culture of ‘incentives’ running out of road
Last week in Dublin there was nearly another Rising. Almost half of Ryanair’s shareholders, led by the representatives of pension funds, made a stand against one of the most egregious indulgences of sheer greed ever seen in Ireland.
The airline’s board proposed a pay package for its chief executive Michael O’Leary, including a potential bonus of €99 million within five years. The poor man has had his current pay and annual bonus halved to a total maximum of a mere €1 million a year. However, he will have an option to buy 10 million shares at a fixed price of €11.12 a share, should the airline either record a profit of €2 billion in any one year to 2024, or should the share price rise above €21 – in which case he gets his staggering bonanza.
We are now quite used to the insatiable avarice at the top of corporations, and shareholders tend to go along with it. But for 49.5 per cent of Ryanair’s shareholders, O’Leary’s avidity was just too much – they voted against the package.
It is a pity they lost the vote, but the revolt may, nonetheless, be a watershed. It suggests that perhaps there is a dawning awareness that the era of out-of-control rapacity must end. For, leaving aside its enormously destructive consequences for democracy, it makes no sense even on its own terms.
O’Leary’s deal illustrates the folly and unsustainability of the idea that has driven corporate pay packages ever further beyond the bounds of decency or rationality: a warped notion of incentive.
This is one of the big problems with this 'incentive' culture – the fabulous rewards for success are almost never matched by real penalties for failure
Firstly, what is O’Leary being incentivised to do? To undo his own failures. If you just take the proposition behind his package on face value, it looks plausible. To get his jackpot, O’Leary has to double Ryanair’s share price to €21 and keep it there for 28 consecutive days at any time between April 2021 and March 2024.
Wouldn’t that be an amazing achievement worthy of spectacular rewards? Actually, no. Ryanair’s share price in 2017 was €18.60. So O’Leary’s goal is to reach in 2024 a share price that is 12 per cent up on what it was seven years earlier. That doesn’t sound quite so magical, does it?
And in fact, he’s being rewarded for failure. He’s the boss who oversaw the fall in the share price from €18.60 to where it is now – just under €10. He bears responsibility, surely, for the decisions that led to that fall: the very poor industrial relations that have led to strikes by pilots, the screwing up of rosters that led to the mass cancellation of flights, the very heavy bet on Boeing’s ill-fated 737 Max. But because of those failings, he now gets to buy Ryanair shares for €7 per share less than they were would have cost him in 2017.
This is one of the big problems with this “incentive” culture – the fabulous rewards for success are almost never matched by real penalties for failure. (O’Leary’s pay cut is, in the context of his potential gains, merely for the optics.)
Secondly, O’Leary’s pot of gold tells us something about the whole nature of incentives at this level: the outrageous extravagance is both inbuilt and ever-increasing.
But if, like O’Leary, I already have €400 million, I have more money than I can ever spend. No amount of money you offer me is going to make any real difference to me
Never mind the law of diminishing returns, there is here a law of rising returns. At these stratospheric levels of reward, the whole idea of incentive breaks down. If I’m living hand-to-mouth on €20,000 a year and you offer me the possibility to make that €25,000 a year, I have a huge incentive to grasp it because it will markedly improve my life.
But if, like O’Leary, I already have €400 million, I have more money than I can ever spend. No amount of money you offer me is going to make any real difference to me. The paradox, however, is that the less difference the money really makes to me, the more you have to offer me. The money has become purely symbolic of my very special status, so it better be bloody enormous. It is not an incentive to achieve but a tribute to my existing magnificence – so anything less than an obscene sum would be an insult.
The wrong values
Thirdly, a package like O’Leary’s pins the worth of a company to the wrong values. It encourages short-term thinking: the goals must be reached by 2024. And the goals themselves are brutally narrow: the share price is all that matters.
There are many possible measures of success – the satisfaction of customers, the wellbeing and prosperity of employees, the reduction in carbon emissions, the company’s contribution to society.
The one that Ryanair and O’Leary have reinforced (“shareholder value”) is increasingly understood even within corporate capitalism as poisonous. As that bastion of American corporatism, Forbes magazine, put it last week “maximising shareholder value has come to be seen as leading to a toxic mix of soaring short-term corporate profits, astronomic executive pay, along with stagnant median incomes, growing inequality, periodic massive financial crashes, declining corporate life expectancy, slowing productivity, declining rates of return on assets and, overall, a widening distrust in business.”
O’Leary’s golden ticket is for a pointless flight to a bleak destination. Even Ryanair’s own smarter shareholders no longer want to take that ride.