The executive pay debate has been rumbling on for some months now. Earlier this month, David Cameron announced that the government looked likely to introduce measures to cap executive pay – the idea being to prevent it becoming even more disproportionate to the broader economy.
A recent report by Income Data showed that the total earnings among directors at FTSE 100 companies increased by almost 50% in 2010, despite a financial and economic crisis which hit growth and employment. The average total pay deal for a chief executive among the largest listed companies was £3.8m, up 43.5% in the year. This is compared to a 2.7% increase among average employees.
Having asked around, opinions on this topic vary widely. In some peoples’ view the salary and bonuses of top management should be linked to that of the average employee. After all, all employees play a part in the success, or failure, of a business. In some countries publically traded companies have limited the salaries, bonuses and shares of top management to 10 times that of the average employee.
As well as being “fair” this may also help to solve the problem of transparency. Executive pay packages have become more complex and more opaque, meaning that even professional investors sometimes struggle to work out why directors receive the incentives that they do.
Publically owned companies and privately owned companies are, of course, different. Some people are of the opinion that executive pay within privately owned companies, no matter how excessive it may seem to the outside world, is down to the board and the shareholders and has nothing to do with anyone else.
These high levels of pay should undoubtedly be accompanied by high levels of performance in order to justify the payout.
The latest part of the debate appeared in the papers just this morning. There is much talk of RBS chief executive, Stephen Hessler, possibly being awarded a £1m bonus. This on top of his basic salary of £1.2m still makes him one of the lower paid bank bosses in the UK. But we must remember that RBS is a state-run company and 84% of the bank is owned by the taxpayer. While remuneration should be transparent, all public companies really should be keeping a distance between themselves and the pay inflation that is in existence in the private sector.
What do I think? Executive roles are some of the most demanding, in terms of skills, time and pressure, and in the current economic climate, I would argue that we need the cream of the crop to lead our businesses and pull us back from the brink.
These executive roles are also highly competitive and it is vital that boards and chairmen are able to attract the best talent available to these critical roles. We simply cannot afford for Britain to end up being less competitive on the world stage than it currently is.
It is right that those who work hard, generate wealth and create jobs for our country are rewarded. But where huge pay rises are handed out that bear no relation to performance or what their companies can bear, the situation serves to fan the flames of outrage from those who are more realistically rewarded.
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