All in this together? Tell that to our greedy bosses

Columnist

Saturday 29 October 2011

The sole, rational reaction would be: they must be kidding.

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But they’re not. When the executives of UK plc award themselves an average pay rise of 49% in a single year, you can be assured they are not fooling around.

They can keep a straight face, though, these leaders of FTSE 100 companies, while they complain furiously about a 50% tax band. They can seem entirely serious when they claim that average earnings of £2.7 million last year were a reward for “performance”. Explain to me: if our biggest firms are performing so well, why is Britain on the brink of another recession?

Where executive pay is concerned, such paradoxes are commonplace. The latest report on the matter, from Incomes Data Services (IDS), for example, shows that while directors were granted only a 3.2% increase in actual wages, they plugged the gap with average bonuses of £906,044. So which award was intended as a measure of effort, talent and worth?Elsewhere in the private sector, employees are gaining pay rises of 2.6%, if they are lucky. Those workers are also coping with inflation running beyond 5%. Salaries, bonuses, share options, pension pots, “expenses” and various incentive plans – nothing as simple as a fair day’s pay – mean that directors now take away 113 times the national average, currently around £24,000. For chief executives (CEOs), the multiple jumps to 120. As recently as 1998, it stood at 45.Those bonuses help. A report last month from the High Pay Commission charted a 187% increase in that element of executive remuneration since 2002. In that year, bonuses made up 48% of “packages”. By 2010, the average bonus was worth 90% of the reward for sterling work.But that’s another odd little paradox. As the commission pointed out, if bonuses – and never mind the rest – were rewards for performance, how come they showed no correlation with stock market values? The report, examining FTSE 350 companies, showed a 700% increase in executive remuneration since 2002, but only a 21% rise in the market index.It was no statistical quirk. In May, a survey by the “reward consultancy” MM&K, and Manifest, the proxy voting agency, found that median earnings for FTSE 100 CEOs stood at £3.5m in 2010, a 32% increase. In that year, shares rose by 9%. The chief execs had taken only 2% increases in “pay”, but long-term incentive schemes and share option deals had come to the rescue: up by 70%. IDS meanwhile reports that average CEO earnings – as opposed to median – were £3.85m, a 43.5% rise.These phenomena are not universal. In Europe, most company executives lag behind their British counterparts in the dash for cash; increasingly, they also face stricter controls. As in so many things, the model here is the US, where last year the median pay for CEOs went up by 27% while President Barack Obama struggled to create jobs for lesser folk. According to AFL-CIO, the biggest federation of US unions, those executives now claim 343 times the earnings of an ordinary worker. In 1980, the multiple was 42.A series of questions can be posed. How do they get away with it? Should they be allowed – for let’s be fair – to get away with it? If not, what can be done to stop them? If they can be stopped, what might the consequences be?Company directors get away with it because no-one is able or willing to stop them. Their rewards are decided by remuneration committees, but those committees are composed of directors from other, similar companies. You serve on my committee and I serve on yours? How might that work out?Directors face shareholders, as often as not, and in law (or in theory) serve those shareholders. But whereas some countries – Sweden, the Netherlands, big German firms such as Siemens and ThyssenKrupp – grant investors a legally binding “say on pay”, the UK’s regulations provide only for “advisory” arrangements. Remuneration committees are criticised, meanwhile, for being deaf to shareholder protests.But why not? Surely what’s good for business is good for Britain? That might be true if performance was being measured by share values, or even by old-fashioned revenues, or productivity, or a return on assets. The evidence shows that, among the FTSE 100 elite, those yardsticks are barely considered. The effects of widening inequality might meanwhile be a topic for another day, but there are plenty of studies to show that it creates havoc. Trickle down, the 1980s panacea, was a myth: wealth has been sucked ever upwards, for the benefit of a very few.Put a stop to it then? Business Secretary Vince Cable has made a lot of noise on the subject. Last month he said he wanted to “call time on payouts for failure”. Instead, he published a discussion paper, launched a review and suggested that more “transparency” was required. Did he think those remuneration packages were the corporate world’s secret shame? The top firms are brazen.Dr Cable could ask what a bonus scheme means when elite directors rarely get less than 80% of their possible maximum. He could wonder about share options handed out when shares were low and cashed at the market’s peak. He could ask about “pension contributions” that look very like cash in hand. He could even ask if it’s wise to measure rewards by share prices, when any FTSE 100 board worth its finance director – £2m; up 34% – can manipulate those at will.But if Dr Cable were to act, wouldn’t all those talented executives flee the country? The threat is raised often. It was heard most recently when the 50% tax band was introduced. How much of a dent that puts into a CEO’s £3.8m is for the reader to decide: the evidence of flight is hard to come by. Is the talent irreplaceable, in any case? Don’t Britain’s top companies have legions of ambitious junior executives?The questions need not be hypothetical. The High Pay Commission, “left-wing” though it may be, has demonstrated that in a five-year period “only one FTSE 100 company has had its CEO poached by a rival, and that rival was also British”. Could it be that our talent isn’t wanted, or that executives are doing 49% better than nicely, year on year?We are in banker territory: the landscape is familiar. You could impose a maximum wage: Germany and America did that to firms receiving state aid. You could ban bonuses and share options: the French have tried it. You could, indeed, introduce progressive taxation. It might be wrong for a government to tell a company how much it can pay, but society has every right to decide what is fair and unfair. Failing that, a binding vote for shareholders, the company’s owners, is an obvious step, as is the introduction of truly independent remuneration committees. The fact that the big earners of the FTSE have failed to introduce these simple, equitable measures speaks volumes, as usual. Britain is in economic difficulties: you may have heard. Britain also has a child poverty rate just above that of Greece. In Britain, we are becoming weary of a bad joke: we’re all in this together. If those executives won’t be shamed, only legislation remains.

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All in this together? Tell that to our greedy bosses

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