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INSIDE TRACK: The example of the Co-op may yet pay dividends

THE falling out between Co-operative Group chief executive Euan Sutherland and his, now former, employer last week brought the issue of high pay back into the spotlight.

Mr Sutherland's apparent belief that a multi-million pound pay package for himself was a necessary ingredient for the mutual's turnaround stands against two, now well-worn, arguments.

The first is that it is not clear that high pay and generous incentives for managers help company performance. A lack of well-remunerated executives has yet to be identified as a factor that led to problems at Royal Bank of Scotland or HBOS.

Secondly, by widening the gap between rich and poor, high pay damages society. FTSE-100 chief executives' average total pay in 2013 was 120 times the average earnings of their employees. Their world is no longer the world that the rest of us inhabit.

A third, less familiar but potentially more important case has been developed by economist Andrew Smithers, who is convinced that one of the other great worries of our time, poor productivity, is directly related to the way company bosses are paid.

Economists fret over charts that show that productivity has stagnated since the recession. Mr Smithers suggests that this is a longer-term problem dating back to the 1970s.

A typical chief executive of a stock market listed company serves for about four years. After years of schmoozing, of late nights in the office and the petty humiliations of being an underling, this is his (and it is usually a male) brief opportunity to rake in as much as he can.

Everything is directed towards the boosting of dividends and by extension the company's share price to which his share options and bonus are linked.

Expensive investment programmes are out. If production needs to increase, add workers, but do so as cheaply as possible.

The implication of Mr Smithers's analysis is: do all the fiscal austerity you like, the underlying problem is that the corporate system is undermining the wider economy.

"You cannot just feed us with Panadol if the headache is there. The headache dies down, but the problem remains," he told a recent seminar held by the High Pay Centre think tank in London.

The analysis of this former investment banker suggests that most recent proposed reforms, whether the Bank of England's plan for stripping reckless bankers of bonuses or the European Commission proposal to ask shareholders to approve the ratio between board pay and that of the average worker, lack ambition.

Alternative approaches are out there. Sir Charlie Mayfield of employee-owned John Lewis got a little shy of £1m last year. This is more than most of us can dream of but it is little compared to his peers and is linked to what other workers get. That business is prospering.

The Co-op has big problems, but it is not clear that these have been caused by underpaying its executives. Its board has the opportunity to show that filling the boss's pockets with gold is not the only path and in so doing it might take one small step in pointing the British economy in a more productive direction.

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