What can be done about executive pay?

By Contributing editor Emily Hohler Jan 13, 2012

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This week David Cameron, the prime minister, announced he was determined to end the “merry-go-round” of highly paid executives rubber-stamping each others’ inflated pay deals. His remarks about the “excessive growth of payment, unrelated to success” are well supported, says Alistair Osborne in The Daily Telegraph.

According to the latest survey from Manifest and MMK, respectively corporate governance and pay specialists, between 1999 and 2010 the median remuneration for a FTSE 100 chief executive rose by an average 13.6% a year, from £1m to £4.2m. Over the same period the average annual rise in the FTSE 100 index was 1.7% and average employee earnings increased by 4.7% a year. The upshot is a widening pay gap: in 1998 the CEO earned 47 times more than the average worker; by 2010, the figure was 120 times. This system might make the “most committed capitalist” feel “queasy”.

Growing inequality “makes a mockery” of George Osborne’s mantra, “We’re all in this together,” says The Independent, but recognising the problem and doing something about it are different things. Calls for transparency miss the point.

Transparency of sorts led to public anger about high pay in the first place, and it hasn’t made much difference: bankers continue to pay themselves obscene amounts. Transparency has also, says Alistair Osborne in The Daily Telegraph, contributed to the upward pressure on pay as bosses use the information to strengthen their bargaining position. Intervention is needed, “and at a level which does not sit well” with Conservative ideology.

The government proposes that the shareholders’ vote on executive pay should be legally binding for remuneration committees. “It is hard not be sceptical,” says The Daily Telegraph. “There will almost certainly be unintended consequences.” It could mean renegotiating thousands of contracts for employees. And what about the traders and dealers who often earn more than the directors – are they to be included? There is a danger that Cameron will end up devising a “stultifying regulatory framework that discourages enterprise and wealth creation”.

Moreover, shareholders “don’t care” about pay unless it hurts profits and dividends, and most pension funds and insurance companies, the bulk of owners, “keep their distance”, says Bill Emmott in The Times. The likely outcome is that Cameron’s efforts will be “abstract and ineffective”, while “efforts to control most people’s pay, through wage freezes, pension changes and tax rises, will be real and painfully effective”. The result will be that, “having drawn attention to fairness, Cameron will be associated with an unfair outcome, and look insincere”.

The real problem is that the success of our FTSE 100 companies stands in contrast to what’s happening elsewhere in the country, says Damian Reece in The Daily Telegraph. Attacking big business when so much is wrong with the public sector is a “transparent diversionary tactic for a coalition uneasy with itself”.

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Published in UK economy | More articles by Emily Hohler

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  • 1. John

    (16 January 2012, 12:21PM)  Complain about this comment

    This is Camerons foxhunting moment. Find an irrelevance to keep the punters off track.
    Four obvious topics contributing to bizarre pay levels:
    a) The stockmarket has become a casino, nothing to do with investment.
    b) Banks aren't allowed to go bust. Why not? Administrators cope with any other business default, why not banks?
    c) Senior civil servants are paid as if they competed in a risky world. They don't. Cut their pay by 20% and see how many leave for private business. And how much worse civil administration becomes as a consequence.
    d) Tax breaks for savings are predicated on a "manager" of the money. The managers are part of the highly paid problem. The "owners" have no say.

  • 2. davidh

    (18 January 2012, 08:44PM)  Complain about this comment

    the first issue to clarify is that executive pay has nothing to do with a)talent, we might otherwise witness u.k. companies overtaking the leaders in every market sector ... and
    b)success. they seems an inverse ratio at work. the less they succeed the more they pay themselves.
    and this is one or two rouge individuals. but the delusional mass of senior management.
    It is fraud.. and should be pursued aggressively through the legal system by the CPU..
    They need to be brought before parliament to answer
    if we want to get results from these engines for weath creation we desperately need change..en mass..now

  • 3. Barkingmad

    (23 January 2012, 02:15PM)  Complain about this comment

    "Banks aren't allowed to go bust. Why not? Administrators cope with any other business default, why not banks?"

    Because if HMV goes bust individuals lose very little / nothing. If a bank goes bust deposits are at risk and the government (i.e. the taxpayer) would have to repay up to £85000 per person in deposits lost and for anyone with more deposits than that (often older peoples life savings) it would be hugely unpopular.

    So the government is (effectively) damned if they do and damned if they don't.

  • 4. Barkingmad

    (23 January 2012, 02:30PM)  Complain about this comment

    @davidh It is fraud.. and should be pursued aggressively through the legal system by the CPU..

    I'm not saying it's morally 'right' but it's not illegal.

    CPU - did you mean CPS?

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