The City of London banker stared at me with incredulity. I had just asked how anyone, when they were paid £2-million a year and working at full pelt, could work that much harder if offered £10-million. Surely, £2-million is more than enough for anyone’s needs? You obviously work for (liberal-leaning) The Guardian, was his retort.
The highly paid banker did not understand my question and could not answer it. This exchange underlined for me how far executive pay has become divorced from reality. It is not, it appears, about money any more. Or not entirely. A hefty pay rise — to, say, £10-million — can, according to people who know these things, give entry into a whole new social set, not open to those with a mere £2-million a year.
But it is also about self-worth. Company directors are comparing themselves with their peers. If one chief executive is paid in the millions, another will want to match him (and it is almost always a him) and his perks. This is how many of them judge their own value.
And, increasingly, directors of public companies are ranking themselves against their rivals in the private equity world. Private equity groups are buying more and more public companies and taking them away from the stock market. Out of the public eye, the partners in private equity earn huge payouts for turning companies around, and they guard the details of those windfalls closely.
And now their peers in the world of quoted companies are demanding private-equity style rewards for improving performance.
New signs of excess arrive daily. Last week Richard Lapthorne, the chairperson of Cable & Wireless, signed up to a new pay deal that could see him pocket £11-million over three years. At the same time, the telecoms company has proposed removing the cap from a pay scheme for its United Kingdom and international bosses, which could mean that they will earn more than £20-million each by 2010. Over at Marks & Spencer, meanwhile, chief executive Stuart Rose has been awarded a cash and shares deal worth £7,8-million.
I am not opposed to the principle of decent pay for good performance. Not everyone wants to be a chief exec, and it is a tough job. But a lot of these pay awards reflect pure greed. The constant ratcheting up of rewards for executives means they are expanding out of all proportion to those on the shop floor.
In The Guardian’s pay survey last year, the highest-earning director, the boss of the mining company Xstrata, was paid 544 times the salary of the average mineworker. When pay for Britain’s top bosses becomes so astonishingly out of line with how much those at the bottom earn, it is time to ask what can be done.
The solution can lie with the remuneration committee. This consists of a small group of board members who construct these pay deals. It is made up of non-executive directors whose job is to represent shareholder interests.
The trouble is, many of these non-execs are themselves executive directors of other boards and have similar pay packages to be approved. The system can be self-reinforcing. It looks a bit like this: you fill my wallet and I’ll fill yours. These committees need an injection of common sense and a few members for whom million-pound pay packets are not the norm.
But is it too much to ask that the directors themselves show some moral leadership?
Britain’s top bosses must surely realise that they are stretching credibility with their current reward schemes. Common sense should prevail before it is too late. — Â