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High Pay – time to call a halt to the executive gravy train

January 25, 2012

Vince Cable has made announcements this week on Coalition Government proposals to help rein in excessive levels of pay for company directors and senior staff.  It’s an issue that I have raised on many occasions so I’m pleased to see action at last.

As I pointed out in a debate on bankers’ bonuses on Monday, executive pay and bonuses are meant to be the reward for successful stewardship of a company.  The company is owned by the shareholders – which in many cases are the pension funds of millions of people.  If the company has done well, the dividends increase and the share price rises then the shareholders will be happy.  And if that success is down to clear strategic thinking by a director, then a bonus is in order.

But the evidence of the last decade is that while company performance has been modest, executive pay has rocketed.  The big problem is that company boards effectively set their own terms and conditions.  The remuneration committees devise remuneration packages that will have a generous base salary, a bonus entitlement, pension contributions, long notice periods and a host of other benefits from school fees for the children to flash cars with maybe a chauffeur thrown in.  Two issues arise.  These committees are being generous with other people’s money and their membership is all too cosy.

It’s not the job of government to tell any company what it should pay it’s staff, beyond the minimum wage.  But it is the role of government to make sure that companies are properly regulated so that shareholders are protected from greedy or incompetent directors.  So Vince is right to want to open up the remuneration committee memberships and to ban full time directors of other companies from sitting on them.  They have too much of a vested interest in bidding up pay in another company so that their company follows suit.  It’s also right that shareholders and the public get see in much greater detail what is being paid to directors.   It’s time to call a halt to the executive gravy train.

But bankers and directors of other quoted companies are just part of the problem.  Huge rewards can often be received for modest talent in other parts of the private sector and the public sector.  As I pointed out in the aftermath of last August’s riots, people resent the easy rewards for some pretty minor “celebrities”.   And one of the reasons why the country has a budget deficit is the huge increase in pay for public sector senior managers under Gordon Brown.  Yesterday at Treasury Questions I raised this with my colleague Danny Alexander, Chief Secretary to the Treasury.  Here’s the exchange from Hansard:

Stephen Williams (Bristol West) (LD): The Business Secretary’s announcements will give more power to non-exec directors and shareholders to control pay in the private sector. The Government effectively discharge those roles in the public sector, so what measures is my right hon. Friend undertaking to control high pay in the public sector?

Danny Alexander: Ministerial salaries were cut by 5% and then frozen for the whole of this Parliament. As Chief Secretary, I now personally sign off any new pay above £142,000, the equivalent of the Prime Minister’s pay. That is a vital deterrent to the cycle of ever higher pay at the top of the public sector—so much so that in central Government alone the number of people paid more than £150,000 has dropped by 55 since May last year. When applications come in, I can and do reject them if I think they are too high. In fact, since May 2010 83 like-for-like cases have sought my approval. Pay was lowered in 45 of those cases and frozen in a further 23, saving more than £1 million a year for the taxpayer, including a £100,000 cut in the pay for the new chief executive of Royal Mail.

10 Comments leave one →
  1. John Yapp permalink
    January 26, 2012 10:03 am

    I have no problem with high pay as long as its related to productivity & the Bonus too, but if the company does badly the Bonus should then reflect this, & be a percentage of the profit. In other words, Do well, get rewarded, Do badly, loose job & no Bonus, Simple!

  2. January 27, 2012 12:27 pm

    “It’s not the job of government to tell any company what it should pay it’s staff, beyond the minimum wage.”

    Why not?

    Isn’t it the government’s job to govern? Shouldn’t the government deal with closing the gaps in income?

    What about a 10:1 ratio in companies from highest to lowest salary?

    Have you read/heard of The Spirit Level?

    Welcome the efforts to change the bonus culture though!

    • January 27, 2012 11:22 pm

      I guess that’s one of the differences between a Liberal and a Green. While I am an interventionist (for instance in education and public health) there must be limits on what the state can do. But we will be giving shareholders the power for the first time to veto pay deals cooked up by the directors.

    • April 27, 2012 11:29 pm

      Distribution of sex with beautiful women (and men) is undoubtedly a cause of societal strife. Should the state intervene there too?

  3. Paul Bemmy Down permalink
    January 27, 2012 6:17 pm

    Harry Redknapp says he earns between 35 and 40 thousand. That means he gets about the same as the CEO of RBS including his bonus. Is this a problem?

  4. Paul Bemmy Down permalink
    January 27, 2012 6:18 pm

    Sorry, that was ofcourse per week.

  5. Fredrik Eich permalink
    January 31, 2012 12:39 pm

    Most people I think now accept that it was no good importing coal from abroad and then the state employing people to dig it up again, it was never a sustainable model. So the state owned mining industry gets destroyed while private banks get the sort of tax bailouts
    miners could only dream of.

  6. Tim Wilson permalink
    February 21, 2012 1:19 am

    As you pointed out the shareholders own the company, and are represented by the institutional investors, who already discuss CEO pay. Having been at these discussions, if they were a little less greedy in what they expected by the way of company returns, for example 10-15% returns in a 1-2% inflationary time, companies might not create such dangerous bonus plans putting their companies at risk.

    What we need is a more realistic expectation about company earnings, and more sensible remuneration packages that don’t make multi millionaires out of mediocre people. We will never get either as long as the institutional investors are focussed on annual earnings and not long term business sustainability.

  7. February 21, 2012 2:52 pm

    Tim – thanks, you are quite right to make the point about the devil of short termism. It’s actually a timely remark. Later this month John Kay will be publishing the draft findings of a review he’s been carrying out for the Business Dept, commissioned by Vince Cable. The review has taken evidence on short termism in the City. Here’s a preview:

  8. Michael Slater permalink
    February 21, 2012 6:37 pm

    In France they have the concept of a malus as well as a bonus. Executives who are in line for a bonus if they contribute to the company’s doing exceptionally well should also risk a malus (deduction from pay) if it does exceptionally badly (RBS?!)
    Michael Slater
    8 Royal York Crescent
    Bristol BS8 4JZ

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