New pay rules just won't work
You do not have to be a socialist to think that pay in Britain's boardrooms has gone off the scale. It may seem acceptable for directors to be generously rewarded in times of prosperity but in hard times like now, the least that might be expected is some leadership.
The difficulty is that many top executives, for all the contribution they have made and continue to make to the nation's prosperity, live in a world of their own where the sense of entitlement outweighs normal decent values. As former Confederation of British Industry (CBI) boss Sir Richard Lambert has noted, executives are in danger of being seen as "aliens" living in a "different galaxy from the rest of the community."
There have been plenty of examples of this of late. There was the Tesco head of retail stores who thought it was acceptable to sell £200,000 of shares a week before the company reported falling sales and its shares plunged 16 per cent. At state-owned RBS it was revealed that the head of investment banking John Hourican is due to pick up £4 million in bonuses while the "casino" arm of the bank, which he runs, is to shrink and 3,500 jobs are to be lost. Meanwhile, Barclays chief executive Bob Diamond –- who last year delivered a business lecture urging banks to become better corporate citizens - is due to collect a £10 million pay package.
Something about the boardroom seems to distort values. Lord (Simon) Wolfson, the chief executive of Next, has proved himself year after year among Britain's most successful retailers. But when he appeared on BBC's Question Time late last year he was roundly booed for suggesting an extra £40 million of spending on the Olympic opening celebrations was a "drop in the ocean." Not if you are a family worrying about child benefits or wondering how to pay this winter's heating bills.
The numbers tell their own story. Last year, when the UK economy barely grew, directors of FTSE100 companies enjoyed overall remuneration increases of 49 per cent according to date collected by Income Data Services. Employees in the very same companies received just over three per cent. Research by the High Pay Commission shows the salaries of directors of FTSE 100 firms have climbed by 4,000 per cent since the early 1980s against 300 per cent for the rest of us.
These are the kind of inequities which can breed social dissent.
If the Conservative-led government is really serious about developing a more equitable system, rather than simply pandering to the LibDems in the Coalition, then Cameron needs to deal with over-generous director pay at its roots. The first and most important change is to engender an atmosphere of social justice which recognises that the rich, like everyone else, should contribute more to society.
The Legacy 10 initiative, which seeks to encourage the wealthy to commit at least 10 per cent of their assets to good causes in their wills, is a move in that direction. The real problem is that in many companies the pay committees are in danger of becoming a club seeking to perpetuate back-scratching, crony capitalism. They need refreshing with new blood from the grassroots workforce, academia, think tanks and even (G-d help us) journalists.
Of even more importance is to stage a coup against the head hunters, the search agencies, the remuneration consultants and others experts whose purpose in life is to propagate the idea that top managers are irreplaceable.
They argue that unless executive pay rises in line with that of their peers, a great pool of talent will be lost. For providing this advice and collecting comparator data the consultants are paid handsomely. Independent directors and institutional investors have become part of a self-perpetuating oligarchy of rewards, losing touch with reality. They have come to rely on the experts forgetting that it is their job to set pay and protect the interests of investors.
Common sense should have told them that approving "fat cat" pay packets at a time of national sacrifice is divisive, increases the likelihood of social unrest and may even be counter-productive. Failure has been made to pay in companies ranging from RBS to Thomas Cook. As such, the whole system has been brought into disrepute.
Alex Brummer is City Editor at the Daily Mail