Time to turn tide on boardroom pay

By This Is Money
Updated: 04:05 EDT, 31 May 2011

Sanctioning the creation of a corporate master-race is socially divisive, and doubly dangerous when pay and performance are decoupled, writes Daily Mail Associate City Editor Ruth Sunderland.

All sorts of reasons are trotted out to explain the size of the pay and bonus packages handed out to FTSE 100 chief executives.

Top pay inflation has been driven by globalisation, prompting the bosses of UK companies to demand US-style pay.

Packages have been pushed up because talented chief executives could make far more if they moved into the world of private equity, with the added benefit that they can keep earnings a secret.

Company chieftains have clamoured for more cash as City lawyers, accountants, investment bankers and other advisers frequently make more than the CEO.

These factors elucidate the phenomenon of super-sized rewards but they don't justify it.

Few quarrel with large bonuses when they go hand in hand with success, but this is palpably not the case with the packages dished out to the heads of most FTSE 100 firms.

A report by City consultancies MM&K and Manifest found that the average earnings of chief executives in the Footsie rose by 32% last year, despite the economic crisis.

Over that period the FTSE 100 index rose just 9%, and the pay of many employees was frozen or fell. The decoupling of pay and performance is even more marked over the longer term.

In the dozen years since 1998, the cumulative growth in total top executive pay was 323%. That compares with 54% growth in average UK earnings, a 35% increase in the retail prices index and zero - yes, zero - growth in shares in the FTSE 100.

Chief executives of large companies have gained far, far more than any other group with a stake in UK plc. Their average total pay last year was 120 times that of the average employee, up from 45 times in 1998.

Many ordinary employees receive bonuses, but these are normally a fraction of salary, not a multiple.

Things are different in the boardroom. There may be caps on bonuses, but these are frequently set at 200% or even 300% of salary.

In a quarter of companies, the boss is paid twice as much as the next most highly rewarded director. Can this be a reflection of their relative worth? Are there really so many subpar number twos shuffling around in the shadows of their great leaders? One can only hope not.

Sanctioning the creation of a corporate master-race, whose rewards are increasingly divorced from everyone else's, is socially divisive in itself. It is doubly dangerous when there is no relationship between pay and performance.

Unlike the personal wealth earned by successful entrepreneurs, it undermines the work ethic and promotes a 'lottery culture' where a lucky few seem to be singled out for riches regardless of real merit.

Governments and shareholder lobby groups have engaged in well-meaning attempts to address the bonus conundrum for nearly two decades.

The latest notions are to introduce a deferred element, which would not be paid out if performance is not up to scratch, and to bring in clawback clauses.

Neither is likely to prove a match for the ingenuity of companies and their tame pay consultants, who as the report notes, have serious conflicts of interest in that they are hardly likely to impose draconian pay restraint on the clients who pay their fees.

Deferrals have not led to a fall in the amount of cash paid out, leading MM&K and Manifest to suggest that companies have introduced 'deferred bonuses' on top of other long term incentives, not instead of them.

Clawbacks are likely to prove difficult to implement and to be a legal minefield. The same applies to attempts to assess 'excessive' risk-taking.

The mystery here is why the big institutional shareholders, who have seen no benefit whatsoever out of the bonus bonanza, have been prepared to tolerate the situation for so long.

Perhaps the pay revolt at HSBC last week, where a fifth of investors refused to back remuneration for senior staff, is a sign the tide may be beginning to turn.

Since the large institutions have been so ineffectual, small shareholders and retirement savers need to make their views known, at annual general meetings or by contacting their pension fund trustees.

It is time for some popular capitalism.