Coffee House

Yes, pay of the one per cent is unfair. But worse: it’s rational

26 July 2013

You don’t have to be a socialist to be alarmed at the way executive pay is, once again, spinning into the stratosphere. Did the head of Burberry really need £16 million? And the head of Nationwide £2.6 million? It fit a trend: the average FTSE100 chief executive salaries are rising again – by about 10pc according to the latest figures – and we can expect a repeat of the old debate about the high pay being a problem that needs to be tackled. This is a dangerous distraction for anyone seriously interested in helping the poor, as I argue in my Telegraph column today.

The problem of high executive pay is actually worse than it first appears. If it were a simple case of plunder or back-scratching, it could be ironed out with a few investigations. Shareholders don’t want to pay a penny more than they have to – and if they were being conned by remuneration committees who had grown too close to the people whose pay they were supposed to be monitoring, then this could be ended quickly. But if you look at privately-owned companies – where the people writing the paychecks are putting up their own money – the pay is, if anything, larger. A Chicago University study showed this trend is everywhere: lawyers, architects, sportsmen, engineers: the pay for those at the top is spinning away from everyone else. The bankers are just the most visible part of an unseemly trend.

It’s all down to scale. In a recent paper, Harvard’s Greg Mankiw put it well (pdf): companies have grown so large that the difference between being run badly or run well is measured in billions. A chief executive capable of making that difference is paid in millions. The size of these companies drives up salaries, because people can now leverage their talents on a global scale. Same goes for the world’s best architects, lawyers, computer programmers and engineers. If JK Rowling can sell books from Jakarta to Jedborough, then can we begrudge her riches? And new pen names? If a singer makes tens of millions because tens of millions around the world want to buy her records, is that an outrage? The FTSE100 is now largely a global index, with executives applying their talents over borders. The same rules apply to these far-less-glamorous people.

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That doesn’t make it any less jarring: seven-figure pay offends a basic sense of justice, especially at a time when so many have it so hard. So what to do? Every inquiry into high pay hits the same buffer: in a free society, there’s not much you can do to control what people pay each other. No matter how crazy you think it is, or how sickening the sums. You can intervene with the tax system once they are paid, and make things fairer that way. If they’re earning superbucks, then they should pay superbucks in tax.

In Britain, the top 1pc pay 30pc of income tax: a record high. And the lower-paid half of workers will this year be asked to contribute less than 10pc of income tax. A record low. This strikes me as being fair.

The rich may be deeply annoying, but it’s hard to argue that they actually harm society. Not a penny of the UK government deficit was caused by bank bailouts, for example. It’s also hard to argue that the pension funds (who control votes on pay) are being conned by greedy chief execs – especially if top pay rises when the companies go private.  JK Rowling and Burberry’s Angela Ahrendts are producing things the whole world wants to buy, so they deserve the rewards. Nowadays, those rewards come bigger than ever. They are not stealing the money, any more than the directors of Nationwide (who oversaw such jump in profits) were stealing their salary. The fact of it is that these people get paid the stupefying sums because they’re worth it. At least according to the cold metrics used by people who set their salaries.

Some on the right think this doesn’t matter, and that you should be relaxed about people get filthy rich as long as they pay their taxes. I do mind this: there is something outrageously offensive about the sheer inequality, the increasing social bifurcation and the way our society seems to be coming apart more broadly. It’s bad, getting worse and there’s no point pretending this is a blip of corporate greed that will soon pass. There are solid, rational reasons behind pay soaring at the very top – so this phenomenon will be with us for some time to come. But no government anywhere has helped the poor by railing against the rich. The task is of government is to run a fair tax system. Even Gordon Brown understood this: it was precisely his hunger for tax revenues that made pin the top rate of tax to 40 per cent. He viewed the rich as worms, necessary to till the soil.

Tolerating the rich is the price paid by those who seriously want to help the poor – and the latter is what government ought to be all about.


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Show comments
  • justin underwood

    We are governed by a truly revolting class of people and their institutions.
    I don’t have a problem with excessive director’s salaries. However when a 500% pay rise over four years is built on the backs of mimimum waged employees then that is a little bit cheeky.
    And during a time of economic crisis. Even more obscene.

  • 5antiago

    “In Britain, the top 1pc pay 30pc of income tax”

    That statistic merely reflects the fact that the top 1pc have all the money. It doesn’t provide justification for the cause, it’s just an observation of the results and the two shouldn’t be confused.

    If my pay was £5 trillion and I paid 10% tax, I would contribute the most to the income tax take out of anyone. Sounds a fair deal to me. We don’t really need to discuss how my pay got so big, I contribute so much to society after all. I might even leave if you push me, THEN where will you be?

  • E Hart

    You ‘gyre and gimble in the wabe’. The proposition in nonsense. It is manifestly obvious – even for a would-be disingenuous Scandinavian fellow traveler like yourself – that a better distribution of the cake makes for a more harmonious whole. Who are you trying to kid? You are not stupid, why do you buy this stuff? There is something distressing about why this discussion continues. It remains a truism that the better the distribution of wealth, the better things are.

  • Joe

    “A chief executive capable of making that difference is paid in millions.”

    Rather than tens of millions or hundreds of millions? The headline here is backwards. Anything can be rationalized, but fairness has moral implications. Hard work is necessary but not sufficient for attaining a CEO position. You also need luck, and a lot of it. Not to denigrate the lottery, but luck as a primary variable shows that compensation to CEO’s, while able to be rationalized, cannot be justified.

  • Smithersjones2013

    It is not their wealth that is the problem but the vested interest and power automatically awarded them. The real battle of the 21st Century is stripping the current inadequate and inept elites of much of their power. No longer is redistribution of wealth the name of the game, it’s redistribution of power.

    And no, nobody who gives £1 million to the Labour Party is worth it!

  • Curnonsky

    Journalists seem particularly obsessed with the rich – a case of envy? Perhaps they focus on corporate execs and not sports heroes, pop stars and actors because, unlike corporate leaders, anyone can see what makes them exceptional and therefore worth the staggering sums they earn. Most journalists have zero business experience beyond dealing with their own bosses and imagine that CEO’s are interchangeable members of the old boys club, and by definition overpaid (especially by comparison with the immensely gifted but poorly rewarded members of the scribbling class).

    Envy – the root of all socialism.

  • Mickrab


    As promised on Twitter this morning I set out below a few comments on your NS

    Firstly, my credentials for some of the views I put forward. I was for 13 years until retirement Head of Group Procurement for a major UK financial institution. I was part of the senior management team and, although not a Director, I worked closely enough with the Executive Directors to have a pretty good insight into how the place worked. Also, as Head of Procurement, I was involved in negotiating contracts in all areas of the business including some key consultancy contracts which will become relevant later. Prior to that I worked for 20 years as a
    Purchasing Manager in a nationalised industry, so have seen both sides of the
    public/private coin.

    I believe in the concept of free markets, but am concerned that the principles
    which should underpin the operation of free markets have been substantively
    eroded in the last 40 years, particularly under the Tory government of 1979 to
    1997. We have gone over the top and many of the essential preconditions for free markets no longer exist.

    I generally believe in private ownership of business where there is genuine
    competition, opportunity for new entrants at a realistic cost and effective control
    of the tendency towards oligopoly, cartels and monopoly. I do not believe in privatisation of monopolies (my own Yorkshire Water, East Coast Railways, National Grid, Railtrack, The Post Office) or where barriers to new entry are so great that enormous public subsidy, public subsuming of liabilities and/or pricing
    guarantees are necessary. If they are necessary then the enterprise is not suitable for privatisation

    I will kick off with an area of agreement on high pay. I have absolutely no problem with the likes of JK Rowling, Mick Jagger, Damien Hirst, Wayne Rooney or other such people (the architects, engineers and lawyers you mentioned) earning as much as their talents merit. They are in open competitive businesses where customers have an absolutely free choice as to whether they wish to make a purchase. Customers vote with their wallets, and the people I mentioned always have the risk that the cow will run dry – high risk and high reward. I also have no problem with real innovators such as James Dyson, Stelios, or even the outrageous Michael O’Leary, earning great sums. They are highly talented entrepreneurs who have enriched our lives in one way or another. But they still embrace risk, are dependent on the public freely choosing their companies and there but for Gerald Ratner go they.

    On the other hand I have a great interest in what the Chief Executive of my local
    Yorkshire Water Authority is paid. This is a privatisation that should never have been. It is a monopoly, I am a captive customer (scarcely protected by Ofwat),
    prices are set by the regulator to ensure their profitability and therefore
    there is no commercial risk. Granted there is a job of business management to be done, but we have no idea how efficiently the company is run. Whoever
    the man is he is no James Dyson and his reward should reflect that.

    Now we come to the major area where I take issue with you; three statements which I do not believe stand scrutiny. My point of reference is the Finance industry to which I am closest, though I am certain similar applies elsewhere.

    “Shareholders don’t want to pay a
    penny more than they have to – and if they were being conned by
    remuneration committees who had grown too close to the people they were
    supposed to be monitoring, then this could be ended quickly.”

    This does contain a truism that non-Execs grow too close to Main Boards. Examination of the notes to any accounts will show you that Execs set the remuneration of non-Execs, so it is hardly likely that the latter will be tough on the Execs. On top of this you are a non-Exec for my company and I am a non-Exec for
    yours. Who wants to rock the boat?

    By definition the “shareholders” will not be the man in the street with his 1500
    shares, it will be the big boys – the main institutional shareholders who hold
    billions in shares. The risk for these guys is killing the golden goose. Who is
    going quibble over a few million extra on remuneration when the alternative
    would be an embarrassing and unseemly public row between shareholders and the
    Board? This could hit the share price and cost the big boys many tens of millions.
    Best just nod it through lads!

    “It’s hard to argue that that the pension funds (who control votes on pay) are being conned by greedy Chief Execs…”

    See above. It’s not that the institutions are being conned, it’s just that the risk of rocking the boat is not worth taking.

    “At least according to the cold metrics used by people who set their salaries.”

    It’s loose change to the big boys, not worth the risk. As for cold metrics, I will come to that later.

    “You can intervene with the tax system once they are paid, and make things fairer that way.”

    Nice idea, shame it doesn’t work. As Leona Helmsley once said, before she went to jail, “Only little people pay taxes”. Unfortunately she spoke the truth. We are talking here about very high net worth individuals. They will be besieged on all sides by rafts of tax accountants breathlessly shoving at them their latest barely legal tax avoidance scheme. Expensive? Nah, the accountants take their remuneration as a percentage of the tax saved by their little dodge. No risk for our Chief Exec. No pain and plenty of gain. Of course your local branch manager won’t be able to do that – but his Chief Executive can. All fair there then.

    In Britain the top 1% pays 30% of income tax: a record high. And the
    lower paid half of workers will this year be asked to contribute less than
    10% of income tax, a record low. This strikes me as being fair.”

    Looks reasonable at first glance, but I think we need a few additional figures to get
    the full picture before we can decide if it is fair. What is the average take home pay of the top 1%, and how does it compare to the average take home pay of the bottom half? Secondly how about a graph showing tax actually paid as a percentage of disposable income – after taking into account housing,
    food, clothing, commuting, heating and other unavoidable costs. That might show a different angle to your glib assertion of fairness.

    Now let’s get back to the Finance industry which I recall fondly. There are a number of different players in the industry. We all know the obvious ones: banks, building societies, insurance companies, fund managers, the Bank of England, the Treasury and the London Stock Exchange. But there are also a few others less obvious
    to the man in the street but who are key players: recruitment consultants and
    the Big Four accountants.

    In this country all the key people in the Finance know each other and network on
    an informal basis. When working I knew all my counterparts in the banks, insurance companies in the like. So, I expect, do others in senior management and on Boards. There is a lot of interchange and people regularly move jobs within the industry. Treasury figures keep their noses clean in the hope of a few lucrative non-Exec positions when they retire. To put it bluntly they all piss in the same pot, and what is good for one is good for all. Sort of like the Masons but without the aprons!

    Say Company A decides on a salary review. The normal process is to carry out a benchmarking exercise, comparing Company A to other companies in the industry.
    Of course the comparators will be carefully selected to produce the desired result, but to ensure independence Company A will hire one of the Finance
    industry’s leading HR Consultancies. HR Consultancies normally have both a recruitment division and a consultancy division specialising in pay and rations as well as general HR policy matters.

    We need to be clear about the role of the HR Consultancy here. The main role of these, like all consultants, it to give the client exactly what they want – cloaked in a veil of independent analysis. This is essential if they are going to be selected for any more consultancy work or future recruitment business across the hall. It is of course the HR Consultant who selects the comparators, carefully chosen to produce the client’s desired results. Game, set and match! The client gets the desired result – but there is a sting in the tail. The Recruitment division then gets the future recruitment work, but how are they remunerated? ON A % OF THE NEW HIGHER SALARIES THEY HAVE RECOMMENDED! It’s beautiful – double bubble as they say!

    There are your “cold hard metrics”, Fraser. Still want to tell me they’re all worth it?

    As for the Big Four. I don’t have time to write a book, but if I did I think I would use The Godfather as a template.


  • Luke

    And another thing:

    “In Britain, the top 1pc pay 30pc of income tax”

    In Britain, income tax is about 22% of tax raised. So that fact you quote (which I do not dispute) shows the top 1% are paying about 6.6% of all tax raised.

    Once you allow for children, pensioners, unemployed, low waged, non-working mothers etc, that seems pretty reasonable.

    What proportion of the VAT, NI, rates, booze/cigggy/fuel duties, Stamp Duty, etc, they pay, I do not know. Probably above average. But no way 30%.

  • Luke

    The real mega bucks are CEOs, and top few bods at big companies, ie the 0.1%. Doctors and lawyers are merely the 1%. And I agree it could be rational to pay CEOs that much, but NOT because they are that productive. We pay them that much so they don’t loot the company. It’s protection money. The bigger the company, the less one CEO can do to improve it, but the more it is worth for us to bribe him not to loot it.

  • well_chuffed

    There are a very few bosses who have creative ideas and do innovative things. The rest just copy and could be easily replaced. Therefore , most are vastly overpaid and have a highly inflated sense of their own value.

  • Radford_NG

    There are also the jumped-up little oicks of Town Clerks [once an honourable title] who now call themselves CEOs and are paid accordingly;and get huge pay-offs if dismissed.

    • FrenchNewsonlin

      Indeed. The so far undocumented tale of how the honourable Town Clerks, Borough Engineers and unpaid town Councillors of yore became a taxpayer-funded gravy train of hugely over-entitled “CEOs” and “cabinet members with portfolio responsibilities for dog detritus” today is a monumental scandal. In its 13 years of ruinous governance Labour managed to make Town Halls centres for every kind of unemployable jobsworth it could wean off the dole rolls.

  • Chris Rose

    The high pay doesn’t bother me so much as the feather-bedding that seems to go with it. Why do people on super-high salaries need super-high payments in compensation if they don’t perform as hoped and are sacked?

    If you receive a high salary you should accept that you can be sacked at any time without notice or compensation. If you do a good job, you are welcome to the salary, but you’ve no right to compensation if you don’t.

    • El_Sid

      A related problem is giving bonuses as heads-I-win-tails-I-dont-lose options (or cash), give them shares and then if things go badly they share the pain with other owners of the business.

  • willshome

    If you used a picture of J K Rowling to head up an article saying liveable benefits
    for single mothers can increase the country’s net wealth and stimulate
    British industry in the long run, fair enough. But what a dishonest argument to lump her in with CEOs in an attempt to persuade that people getting big salaries and bonuses are worth the money. The payment for an artist is not a salary, it is the pay-off on a gamble. So Rowling, or Hockney or Elton John are no argument for paying businessmen squillions unless, in those years when the company loses, the people who make the decisions get nothing. Not a penny. And in fact have to sell anything they own to make up the shortfall. And in fact have to take on debt to feed their families and take a second job cleaning toilets when their day’s work is over.

    We’re not stupid.

    • Mr Frost

      Apparently you might be.

      • E Hart

        If it’s apparent, it’s not a possibility, it is. Unfortunately, you don’t know the difference.

  • Greenslime

    This is three-dimensional chess territory.

    The NED’s should act as the first line of defence against excess and avarice, but turkeys rarely vote for Christmas. There are, I suspect, few strong non-executive directors who have the bottle to stand up to excessive remuneration, particularly when their own survival depends upon it. My experience is, and I do disservice to some I know, that most members of boardrooms, NED or not, are all members of a huge backscratching society. Unfortunately you will never change that, it is part of the human condition – you will find exactly the same problem in any institution; other excellent examples being the BBC and trades unions.

    The large institutional shareholders could do something but won’t.They are not interested in moral arguments. They are interested in returns for their funds. So long as they stay high, they are happy. If they are happy, why would they vote to make the board which makes them happy, unhappy? That is not going to change because everyone in the chain is incentivised by success. A pension fund manager will very soon be punished if his/her fund ‘underperforms’ (the benchmark by which even if your performance is garbage, as long as it outperforms all the other garbage, that’s OK), firstly by investors shying away then, pretty quickly, by getting fired. Therefore, unless the fund’s ethics are set in concrete within its paperwork (and that, as the CoE has just discovered, is mighty difficult), investments will be made purely and simply on the basis of long-term success. Anyone who has a pension, should not want it any other way. The result, in any case, is that Institutional investors have settled on a policy of, pretty much, across-the-board acquiescence when it comes to how much a company remunerates its board.

    Our tax system takes a slug of the blame too. 50% + NI + loss of allowances + 20% VAT creates a situation where those with the purse strings will, and can, ratchet up their pay to bring them back to where they would have been under the old system. Once one gets the taste, it is difficult to break the habit. Our tax system is pernicious because the politicians like it complicated. Complication enables them to play stupid political games for the sake of short-term political advantage, NOT for the good of the population. Make taxes simple and make the supporting laws simple and clear – and everyone will be able to understand what is going on. But they won’t do that.

    Can we trust the media to create balance, highlight greed and shame boards? Not a chance. The most popular papers are all of the ‘Mr Angry’ variety. Objectivity is a dream. Rabble rousing the aim. Twisted stories and lies are the result. The balance to these rags is the BBC which is virtually the only mass-market proponent of the left’s agenda. It is usually subtle and intelligent in how it does this (the agenda, the slant of the questions, constant interruptions, the exasperation when dealing with things they think are not ‘progressive’ enough to break up a cogent point).

    I don’t make predictions and I never will, but nothing is going to change!

    • El_Sid


      The NED system is fairly broken at the moment, some can add a lot of value but there’s too many just picking up a cheque in return for lending some outward credibility to a company. I’ve direct experience of several NEDs with stellar CVs who failed to spot major problems at the companies they were meant to be overseeing. If members of the boards aren’t interested, how can shareholders spot these problems?

      Institutions don’t take a great interest in things like pay because it’s just not in their economic interest to do so given the amount of their time it takes up to effect change and the small difference it makes to the shareprice. They are there to make money for their investors, but if their fund is invested in say 200 stocks that means they have but a couple of hours per year to monitor each company (in addition to researching new investments and schmoozing their investors). If there’s major corporate governance issues then they’ll just sell out and let someone else invest the many hours/days required to sort it out, so things like pay just get through on the nod.

      I don’t buy Fraser’s claim that it’s worse in private companies, you have to compare like for like and I don’t see any stock-market companies to compare with JK Rowling or a QC. I suspect that there’s not much difference in cases where the companies are comparable – take the supermarkets, do Waitrose and Asda pay much more than Tesco and Sainsbury?

  • starfish

    Utter nonsense. Executives are paid what shareholders think they are worth.

    • Greenslime

      That’s garbage. Shareholders, as we have seen on multiple occasions recently, can do little more than embarrass boards. Until institutional investors become more activist (and I know some have been doing that recently) shareholder power is a myth. Institutional investors are interested only in steady returns, they do not care, per se, about how much a board remunerates itself.

      Hedge funds are more likely to be activist but, again, they are not interested, per se, in what the board pays itself as long as the company is performing to par or better.

      • starfish don’t is company money not the state’s.if shareholders are content so be is called capitalism.seems few on this thread understand it.

        • El_Sid

          I suspect Greenslime’s well aware of that – but many here have an altogether unrealistic idea of how much power shareholders actually have (or at least, choose to exercise in practice). I suspect that Greenslime like me has seen too many examples close-up of high-minded concepts of corporate governance fail utterly in the real world – that mention of directors wanting a payrise to compensate for Gordon Brown’s increase in income tax makes me think of a certain property company in particular….

          • starfish

            That may well be true. But it is no justification for poorly framed comment on the iniquities of remuneration

        • Greenslime

          I do understand absolutely.

          It is actually the shareholder’s money if you want to drill down further. But the point is, that boards generally ignore shareholders. The institutional investors are at fault because they are, generally, totally passive. So even if a board is kleptocratic nothing happens. Something only happens when the company declines. The institutions are ONLY interested in returns, as long as they are OK, the status quo applies. The little shareholder has no real influence. The equivalent of Joe the Plumber is not likely to be a direct shareholder anyway, he will be indirect through his pension fund – and you know they will do nothing because there is no incentive for them so to do. It doesn’t matter to them whether the CEO gets 10 or 15 million as, per share, that additional £5m is a teeny weeny rounding error (Rolls Royce has almost 1.9bn shares in issue, Barclays Bank almost 13bn). They don’t even care about the share price. They just want a good steady dividend.

          I don’t know that you can stop this. I am wary about government interference and doubt that pension funds will ever roll their sleeves up and get involved. But there is no doubt that the Back-Scratchers’ Convention is well and truly at work in our board rooms. That you cannot deny. Maybe a bit of public shame – a modern-day village stocks – is the only way?

  • Angry Harry

    One major problem concerning those who reach great heights is that if their success is measured by how well they have served some powerful group (e.g. a bank, a corporation, a large department, a political party) the likelihood is high that they are, fundamentally, dishonest people.


    Because those who are honest and open have no hope of competing with them in the long-term struggle to get to the top – and to remain there.

    This is why we keep finding self-serving corruption in the highest of places.

  • Chris lancashire

    As you state, we live in a free society and consequently there is little that can be done by high pay. It is encouraging that pension funds and shareholders are becoming more active in attempting to curb the worst excesses in plcs. As for private companies, there is absolutely nothing that can be done. Where public unrest is stirred is the wildly excessive payments and payments for less than stellar performances. The best treatment for these is the continued exposure by the Press.
    As for Brown’s 40% – that wasn’t his hunger for taxes (although that was gargantuan) it was his political desire to set a trap for the Conservatives.

    • willshome

      If little can be done about high pay (when the majority want to control it), how can you say we live in a free society?

      • Chris lancashire

        It is precisely because we are a free society that we cannot and should not seek to control others pay unless, of course, we have an interest such as a taxpayer or a shareholder. Envy doesn’t count.

  • Tom Tom

    The worst thing about Ahrendts at Burberry is that she is probably Non-Dom so not paying UK taxes. Likewise Scardino at Pearson had Non Dom status and a mansion owned by a Jersey Company at her disposal in London which since her retirement appears to have been transferred to her husband.

    There is real troughing inside companies and it is hardly as if they are dynamic new companies as opposed to over-hyped merchandising businesses making tat in China – don’t expect Burberry to make in the UK for years their US coats were sourced because of the duty on epaulettes in the US Customs Code.

    I am happy for entepreneurs to earn for their efforts but not executives on salary.

  • Daniel Maris

    We need some ratio laws on pay – 10% earners don’t earn more than 1000% of the bottom 10% of earners, or whatever the case may be. All properly audited with so anti-evasion rules.

    But of course that ideally we need some international agreements on that.

    Remember in the land of capitalism they’ve had capped pay in their top sports leagues – in order to keep the sport alive and stop it being killed by runaway pay.

    • El_Sid

      Ratio laws don’t work because if necessary you just put the top earners in a separate company and pay consultancy fees to and fro. Sometimes people’s contributions to a company’s success are more than 90% of the total. Imagine JK Rowling wants to employ a PA in the year she brings out a new book. Are you suggesting that PA should be paid 10% of £x million?

      • willshome

        Highlights the dishonesty of even mentioning JKR in this article. She is, in effect, a sole trader, having written every word that generates her income in royalties herself. That she employs other people/ companies to do other tasks would be analogous to saying your salary should be linked to those Chinese children who make your sneakers.

        • El_Sid

          But she’s not – she’s at the centre of a business empire. OK, the publishers will handle a lot of it, but she doesn’t just write books, she has to schedule promotion, handle fan mail etc. Apparently she maintains a staff of a PA, two secretaries and sometimes a bodyguard. They are much more closely involved with how she makes her money than the people who make trainers.

          More importantly, that’s what HMRC would think, they’d view it as disguised employment. If she tried to contract out “secretarial consultancy” to her PA and secretaries, she’d get caught under IR35.I don’t know how she structures her affairs (other than she appears to make a point of not being a tax exile), but it would make sense to offset the cost of her staff against her income, I’d imagine they are employees of her company.

  • kyalami

    I certainly do not think that the government should legislate against such salaries.

    However, it could choose to make excessive salaries a small consideration in government tenders.

    • Greenslime

      Who makes the decision and how is that mediated? Would it make sense if the best tender was lost because the company fell foul of some civil service pin-sticker and the second tenderer won and then completely cocked everything up. Shareholders should decide what a board gets paid so the solution lies in how pension funds vote – perhaps a mass campaign by savers at their financial advisers?

      • kyalami

        The decision is made in the normal way for tenders. Extremely often, there is little or nothing to choose between tenders; this could be something that swings the marginal decision.

        I agree with your point on pension providers, who, in my view, have been extraordinarily lax wrt exec salaries.

  • Alex

    So, leaving aside obvious problems like the government bailing out the banks ….

    More people in the UK are making huge amounts of money from creating economic value. HMRC take half of it to spend on the rest of us.
    And this is a problem why, exactly?

    • kyalami

      Because the money could be returned to investors in the form of dividends, re-invested in profitable parts of the company, used to pay down unnecessary debt and so on. There are so many of these highly-paid execs who run their companies poorly that I think alternative uses for their salary are well worth considering.

      • Alex

        So who decides who deserves it and who doesn’t?
        You? Osborne? Vince Cable?
        It should be the shareholders. And if they let bad managers grow rich, what happens? The company suffers, shareholders suffer. Better managed companies take over the market.
        The only problem for taxpayers is if the government bails them out.

        • kyalami

          I agree, it should be the shareholders. Mostly these are pension funds, who typically have performed poorly in holding the board to account.

    • willshome

      Read a book. Look around.

      • Alex

        Yeah, thanks for that penetrating analysis

  • HJ777

    Fraser, I really do think that you have got this wrong.

    Of course, some of the very highly paid are worth it.

    But if we are talking about the top 1%, you surely know that this includes a large proportion where their high salaries are as much due to lack of competition and government patronage/licensure as they are to merit. For example, why do medics and barristers feature so prominently in the 1%, but not engineers? Because the numbers entering these occupations are artificially restricted and because they generally don’t face international competition, whereas engineers do. Why are so many bankers so well paid? Some may be on merit, but it’s unlikely that one industry would have such a high proportion of the exceptionally well paid in a free market. Had it not occurred to you that banking is highly regulated and that high pay may be at east partly a consequence of the fact that it is extremely rare (read difficult) for a new entrant to enter the banking market.

    • Daniel Maris

      Bankers are highly paid in the same was as the mafia earns a lot from casinos. They are both in a position to “skim”. There is a culture of skimming that operates through bonuses, remuneration committees, commission and the like.

    • Fraser Nelson

      HJ777 I do agree – there is evidently a mismatch between supply and demand. The factors you mention will be part of it. I recently read Claudia Goldin’s Race between Technology & Education (not on kindle, alas), which explains another part of it. The market often produces moral outcomes: not this time. I’m saying high pay is due to these freakish economic conditions, and not to greed or heartlessness. PLUS there’s not much gvt can do about the rich – but there’s plenty they can be done about (and for) the poor.

      • willshome

        Adopt the principle applied at the bottom of so many businesses. Make everyone earning more than £100,000 re-apply for their own job against genuinely free and open competition – and for half the salary. If they don’t want the job at that pay, there will be plenty of well-qualified candidates that will.

        • dalai guevara

          Ah, now you are committing the Greek fallacy.
          Of course it is much easier to just devalue.

        • Noa

          There is merit in your argument. Ideally any private or public sector business or organisation on the principle that the best and most economic canditate should occupy any position within it.
          In practice of course anyone in employment and with bills to pay wants job and financial security. The low paid workes seek to achieve it through Trade Unions, directors through bonuses and share options.
          We only really notice and objectto the activities of these groups of parasites when their respective tinkerings start to damage and destroy the hosts upon which they engorge themselves. Think of the Union militants destruction of the British car industry, the Quango ‘Chief Executives’ or the smug Lord Patton on salaries far inflated beyond their worth, dispensing public funds, caliph-like, amongst their incestuous coteries.

      • outsideratdisqus

        Dear Fraser,
        If you are right that that big companies choose to pay 6 or 7 figure pay packages because they need to hire the best management talent, that explains why the UK public sector is so badly managed. At the packages we pay, we are only going to get second or third rate chief executives. The current government’s attempts to clamp down on top pay in big public sector organisations can therefore be seen as a cunning plan to drive down performance. ;

    • Martina Weitsch

      And what is more, we have seen that highly paid bankers are not good at their jobs; if they were, we wouldn’t have had the banking crisis, would we!

      • El_Sid

        The job of avoiding banking crises does not fall to bankers, but to their regulators. The system of bank regulation was completely replaced un the Financial Services and Markets Act 2000 – before that the last bank run had been Overend Gurney in 1866, yet within a few years of FSMA we had Northern Rock and all the rest.

  • Colonel Mustard

    Never read any of the books but have never managed to get through one of the films without eventually succumbing to zzzzzzzz.

    • willshome

      And if everyone felt likewise there would be no acceptable-face-of-richness to misrepresent the thrust of this article.

  • Lady Magdalene

    The REAL offense is caused when highly paid Executives are employed in the public sector and, like in the BBC, continually inflate their own salaries. Then, when they are made redundant or have to resign through their own incompetence, they are awarded £hundreds of thousands, before moving onto the next public sector job.
    We can try to reduce the salaries of mega-paid executives in the private sector, if we choose to do so, by not buying their company’s wares. But highly paid executives in the public sector seem to be completely immune from any kind of public action.

    • willshome

      The REAL offense is a culture, created and sustained by crass consumerism, that says that worth of work is measured in money. So that, if you can crank up the amount of money you’re paid, you automatically make it worth more. Which means you feel you deserve even MORE money, which means…

      Public sector bigwigs are merely copying the greedy self-delusion of the private sector at the expense of everyone else, including those millions doing work of real worth on minimum wage. If everyone was paid according to how much worse the world would be if they didn’t do their job, it wouldn’t just be the world turned upside down, it would be the world made healthy and whole again.

    • dalai guevara

      Of course these public sector job hoppers are only copying what they have seen elsewhere, in the privatee sector. And that was fine, once.

      Today, proper shareholder control is simply not exercised. The British board oligarchs are taking this nation of well-intentioned Thatcherite shareholders to the cleaners. The good woman would turn in her grave.

      • Hello

        Proper shareholder control? You mean to reduce executive pay, and increase profits? So, you think the way to solve this problem is by making the shareholders wealthier, and reducing executive pay — to move wealth from one wealthy group to another wealthy group? Or do you mean that it could be used to drop prices, so that they sell more and earn more? Or did you mean that “proper shareholder control” is when shareholders act against their own interest to reduce profits?

        • HJ777

          The biggest share holders are pension funds.

          Just because you have a pension fund doesn’t mean you’re wealthy. In fact, the richest pensioners often don’t have pensions backed by funds – because they are public sector pensioners.

  • Count Dooku

    “Tolerating” the rich? The whole premise of this article is crazy! What is wrong with success? Why are people who create jobs and wealth now viewed with such content? Do you not realise Fraser that you yourself are one of these “rich”?
    Far too much attention is given to what the rich earn nit is totally irrelevant. If you want to reduce poverty, focus on the poor and incentivise them with low tax, low benefits and an excellent education.

    • Colonel Mustard

      “Why are people who create jobs and wealth now viewed with such content?”

      (I think you mean contempt) Because the centre ground has shifted leftwards and the narrative of the UK is effectively socialist. The irony is that the division between rich and poor appears to have widened under this narrative.

      • Count Dooku

        Ha, yes! Changed of course. And oddly, latest stats have shown that the GINI coefficient has shrunk under the Tories. “But they are the party of the rich!” I hear them say! Turns out that lower tax and low benefits have a habit of making the poor work to improve their lot.

      • willshome

        Where is the irony? The bulk of the British population believe in fairness and also that fairness and equality go hand in hand. Unfortunately the party that campaigns on delivering that was captured on the death of John Smith by its own upper echelon, which instigated the agenda of the super-rich while spouting the rhetoric of social justice with a cynicism that beggars belief. That’s not ironic. It’s criminal.

        • Colonel Mustard

          No, it is ironic as well, e.g. “Incongruity between what might be expected and what actually occurs”.

          The party that campaigns on delivering that “fairness and quality” is a failure. It does not appreciate the difference between equality of outcome and equality of opportunity, it does not understand the prevalence of unintended consequences and it is not aware of its own hypocrisy and contradictions.

          What is baffling is how it manages to take in so many people when it just doesn’t do what it says on the tin.

          • Noa

            Nor did it deliver ‘fairness and equality’ during its thirthteen year ‘window of opportunity to do so.
            In fact it encouraged corruption and division through a perverse equality agenda and the gap between rich and poor accelerated as a high spending Labour government traded the betrayal of its traditional voter base to pay for its new imported one.

          • Count Dooku

            When in doubt, ask Milton. He always said it best:

    • willshome

      The poor don’t need “incentivising” to do anything. Give them work and they will work, give them food and they will eat, give them access to the very best in education, housing and healthcare and they will use them. It is natural. If the poor do not have work, or enough to eat, and poor schools, homes and health, the problem does not lie with them. It lies with those powerful interests that fight dirty to structure a society in which those at the bottom are paid the bare minimum to fund the upper echelons’ infinite capacity to consume.

      • Count Dooku

        The poor need to be incentivised when there is a huge safety net that provides an alternative to work. If your current income was 30k and someone offered you 25k to sit at home and do nothing indefinitely, what incentive would you have to work?
        High effective marginal tax rates affect everyone, both the rich and poor.

  • Fergus Pickering

    The trouble is that these guys with the huge salaries often have very minimal talents. The top bankers were often bloody fools and possibly still are. They form a backscratcher club, voting on each other’s salary packages. I suggest random assassination or kidnapping of their children, just to make it a bit more risky.
    I except top journalists (and top sportsmen) from this, where a beautiful free market does operate. Continue to enjoy your millions, Fraser. I won’t complain.

    • Portendorfer

      Do not denigrate those who create wealth. Those who squalk are those who do not create and do not shoulder the worry of risk.

      • Span Ows

        I think Fergus’s point is valid as is amply evident in the myriad company failures/scandals etc where those responsible walk away with not only ‘unearned’ very high salary but also bonuses!

      • Fergus Pickering

        Explain to me, dear sir, how the boss of a bank ‘creates wealth’? Excapt for himself, that is. And I think the word you are looking for is squawk.

        • Portendorfer

          The whole wealth of our country is based on the City providing finance.

          • Tom Tom

            The City has NEVER provided Finance unlike Frankfurt. It has been an Entrepot and Rentier Business recycling funds from the East India Company and trading profits. It has never been used to finance British Business – it is simply an international financial trading hub. Most of the Merchant Banks were German Jewish businesses and the Clearing Banks hoovered up the regional banks which were integrated into the local economies. The City has no relevance to Britain as an island beyond its ability to run the Offshore Shadow Banking System for rich foreigners

          • willshome

            This is not the 16th century, nor the 19th. “The City” is a square mile of territory with virtually no inhabitants, projected into cyberspace; any money that comes in comes from elsewhere and is fed out elsewhere, for a fee. Yes our country benefits greatly from that fee. But the fact that Britain’s “whole wealth” – which used to lie in its industry and land and mining and shipping and… – is now stripped of its making and doing function to the detriment of the people and society across most of the country is also down to “The City”.

        • HookesLaw

          Yes – just what do these bankers actually ‘do’? Its a fair point.

          its perhaps that they do not do much thats special except be prepared to take on the risk.

          • FrenchNewsonlin

            What do these bankers do you ask? Well for starters they facilitate money laundering for Colombian and Mexican drug cartels in the case of HSBC. Then they have also committed or connived at myriad other well-documented crimes against taxpayers/citizenry. In addition they also crashed the global economy, thrusting millions into poverty and depriving the next generation of jobs and hope. But apart from that? Well indeed probably nothing very special.

      • Tom Tom

        What RISK does a banker carry ? What risk did Eric Daniels, Andy Hornby, Helen Weir, Victor Blank carry ?

        • HookesLaw

          Well the risk they carry is surely self evident – look at RBS.

      • willshome

        The worry of risk falls even heavier on the shoulders of those who have to face the consequences without having any input in the decisions that cause them. Being made redundant is no easier for those who don’t walk away with a big pay-off.

    • kyalami

      Spot on. JK Rowling has earned her fortune directly by producing a world leading product. However, many of those earning six or seven figure salaries could easily be replaced by one of their juniors and their companies would do no worse and in some cases would do better.

    • HookesLaw

      Yes – you make fair points but I am bound to say that far too many footballers for instance are not worth their salaries, only very few players really do make a difference and are worth their salaries, and in this sense they are the same as the megabucks bankers and industrialists. With silly TV money its easy come easy go.

      The issue for me though is not the salary its what people do with it.

      • itdoesntaddup

        The premium for football comes from restricting access to televising it. If real competition were allowed – several sets of cameras per match with different broadcasters – competition would erode the value of TV rights.

  • dalai guevara

    Fraser, you wilfully conflate things. Where is there any proof for your assertion that remuneration of the 1% is rational?

    The biggest problem with today’s stagnant concerns that are not in family ownership (esp. banks) is not necessarily that they are not growing, that new investment is often not made, but that boards are just taking the mickey. A well-known bank in public ownership LOST £5bn last year, yet its board and top management were in the position to pay themselves £600m+ in bonuses. Where else is this possible?
    That is what VCs would call *asset stripping*.

    But that is of course what is going on – JK Rowling is a smokescreen exemplar really. In a way, I am not surprised she is used to divert from the real delinquents.

    It’s the top 1% that are currently helping themselves to vast sums of freely available QE, the rest of us are fighting for work.

    Yes, let JKR earn what he wants (this is largely a royalty issue, surely) – but that does NOT apply to my bank manager!

  • Angry Harry

    “I do mind this: there is something outrageously offensive about the sheer inequality, the increasing social bifurcation and the way our society seems to be coming apart more broadly.”

    Maybe the solution is to cap the amount of personal wealth that any one person can have. $300 million, perhaps?

    Or is this just a stupid idea that could never work?

    • Fergus Pickering

      Cap it? Who would cap it? How would they cap it? Yes it is a stupid idea what would never work.

      • Angry Harry

        You’re so right, Fergus.

        Your eloquent argument has convinced me.

        • willshome

          Here’s an idea. Nationalise land, nationalise housing and make us all fair-rent tenants for what we occupy. Income for the nation, rationalise wealth.

    • Daniel Maris

      Clever profile pic – got my attention! But is it ethical?

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