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The lefties are right: we really do pay our bosses too much

24 August 2014

The FTSE100 index stands precisely where it did in the first week of December 1999. Whichever way you look at it, shareholders — including pension funds — have had a rotten run on the economic rollercoaster of the past 15 years. So it’s reasonable to keep asking whether the rise in executive pay over that same period is justified: a report from the High Pay Centre says remuneration of the average FTSE100 chief executive is now at a multiple of 143 times that of the average worker in the same companies. In 1998 that multiple was 47, indicating a tripling of top pay relative to workforce earnings while shareholder returns have stayed flat.

Of course this argument is not that simple. There was undoubtedly a time, before the Thatcher revolution, when British company chiefs were miserably under-rewarded; what has happened since is a long pendulum swing chasing US-led norms applicable to ‘global’ companies. The make-up of the FTSE100 has also changed to include more firms that are foreign in all but their London listings and corporate offices; some are mining groups whose workers in Africa and elsewhere are paid very little, distorting the multiple. And the High Pay Centre, though it calls itself ‘an independent non-party think tank’, is in fact the successor of the ‘High Pay Commission’ launched by the Labour-aligned Compass group; it starts from the position that ‘growing differences in pay between high and low earners are neither fair nor proportionate’ and presents its data accordingly.


But left-wingery aside, the ballooning of executive pay is a startling shift in the balance of rewards between providers of capital and hired managers. No politician ever promoted it as a policy objective; shareholders let it happen by hardly ever voting against it. It is easy to justify only in the very rare case of a veteran business-builder like Sir Martin Sorrell of the advertising group WPP, who clocked up a spectacular personal multiple of 780 last year. Heightened awareness of the issue was indicated when the new TSB Bank (carved out of Lloyds) declared a maximum multiple of 65 for the pay of chief executive Paul Pester; this plus a general promise to cap bonuses contributed to positive sentiment for TSB’s flotation in June. The High Pay Centre argues for ‘a democratically enacted maximum pay ratio of (for example) 75:1’ — knowing well that not even Ed Miliband on a bacon-sandwich day would embrace such a provocatively anti-capitalist idea.

But it cannot be a good thing that the multiple should go on growing, unrelated to relative performance, simply because institutional shareholders can’t be bothered to rock the executive boat more often. Let’s have a proper debate about it.

This is an extract from Martin Vander Weyer’s column in this week’s Spectator. Click here to subscribe.

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  • Jose Martins

    It is not only executive pay; it’s also sports stars, TV celebrities, lawyers, fashion models, spin doctors…
    problem is that there’s to much money going around that is not created
    by the real economy but by financial wizardry; that’s why it doesn’t
    filter down to the average Joe: it doesn’t belong there.
    mistake is to consider these excesses (and they are that) fruit of
    Capitalism. Dear oh dear, how blind can we be to not realize that
    Socialism is our staple and the root of our decadence.

    • Augustus

      “it’s also sports stars, TV celebrities, lawyers, fashion models, spin doctors…”

      Not to even mention dead pop stars like Elvis. Doesn’t he still earn about $50 million a year? Even his unwashed underpants, which he wore during a performance in 1977, were auctioned a couple of years ago. And his Bible fetched about £25,000 when it was auctioned in Stockport. You may, however, be right about ‘the root of our decadence’, but it does seem to have some commercial value that matters to a lot of people.

  • artemis in france

    You are right. I am certainly not a socialist, but have to admit that the pay differentials in France are far less marked than in the UK. Here the minimum wage is higher and – apart from a few exceptions – the average wage would seem to be higher. Consequently, personal debt is much lower hère and crédit cards as such do not exist in the same format as it isn’t up to the holder how much they repay as long as the minimum is met. So compound interest is much more limited. People hère try to save and their pensions are more realistic, although not overly generous.

    Although France’s economy is to some entent a basket case, it is more to do with over-regulation than any underlying problem with the employed population. Rents and house prices are generally much lower than in the UK, with the exception of the better areas in Paris and cities like Nice. So again, debt is far less of a problem.

    In Britain, conversely, with rents and house prices continuing to spiral in wealthier areas, it is hard to see how higher debt cannot accrue.

    Both countries could learn from the other.

  • The Laughing Cavalier

    In effect there has been a classic marxist usurpation of capital by a small cabal of workers, in this case the managers, who have expropriated significant sums that should accrue to the shareholders. Banks are the most egregious example of this theft.

    • red2black

      Hence the need for rules and regulations.

  • Fenman

    Mr Brighton that is very naïve. Under the deviant version of capitalism we suffer from to-day shareholders have been disenfranchised, because most shares are controlled by hedge funds and pension funds, who are short -term orientated and whose top managers all belong to the same cosy city club . What is needed is for all FTSE boards to have representatives of small shareholders and employees on them and on the renumeration committees, as the Swedes do, and then you wd see big changes.
    We are now in the totally immoral situation where the real owners of the shares are shut out from all decision making.

  • swatnan

    Cap all Executives pay; the men and women at the top should not get any more than x100 of their lesser employees.

  • swatnan

    Cap all Executives pay; the men and women at the top should not get any more than x100 of their lesser employees.

  • Iain Hill

    Piketty, darling!

    • swatnan


  • Smithersjones2013

    The lefties are right: we really do pay our bosses too much

    Oh dear why do we have to suffer this disingenuous nonsense? ‘We’ do not pay anybody. Bosses are give remuneration packages by their Boards Of Directors and their shareholders. Their is no collective ‘we’

  • Frank Heaven

    Refreshing to see an article like this in the Spectator. The business lobby have been very good at telling us they know best and that regulation of any sort would be ‘bad for business’ and, god forbid, force them to move their businesses abroad. I’m in no way a socialist but perhaps its time to show them the numbers Martin quotes.

    • Jethro Asquith

      But the numbers are meaningless. See the excellent post by oxenstierna if you fail to understand.

  • Bonkim

    Pay levels are dictated by what you can get away with. As in any market – price is what the customer is prepared to pay and CEOs and Boards are adept at manipulating shareholder expectations and squeezing what they can from the goose that lays their golden eggs – without killing it.

  • oxenstierna

    This analysis is poor. Ask yourself the question, if executive pay is the issue, why
    limit the analysis to the FTSE 100? By definition these are the largest
    companies and the salaries of only 100 executives. Why not the FTSE All Share to
    provide a more complete picture? If there was a valid reason to just look at the
    top 100 why look at the absolute level of the index and not total returns
    (including dividends)? Oh, what a surprise, a comparison against the all time
    high rather than a more recent point to evaluate current performance, say from
    2004 or 2009? Having chosen the date in 1999 why go back to 1998 for the 47x earnings
    multiple? Even amateur statisticians should see the obvious signs
    of cherry picking. The ‘flat’
    returns make for a great headline but deliberately ignores
    part of what those pension funds are investing to obtain. While recognizing the constituents of
    the index have changed, the logical conclusion of
    a biased measure is ignored – that companies joining the index may be rewarding
    their executives with higher pay for the increase in market capitalization
    while executives of companies falling off the index may be getting paid less
    (or fired!) – but will be excluded from this ‘FTSE 100′ analysis. To give an
    idea of the complexity I count 183 FTSE 100 constituent changes since
    December 1999. Effective corporate governance can’t
    be judged by counting whether shareholders vote down executive pay – the pay is
    determined and recommended by the board of directors who are voted in by the
    shareholders in the first place. Would we just assume democracy has failed
    if people vote for (not against) the government’s position in a referendum?
    There is a genuine debate to be had about the best ways to improve corporate governance
    but the conclusion of a ‘democratically enacted maximum pay ratio’ should chill
    the bones of anyone who can spot a totalitarian in training.

    • HookesLaw

      idiot article by idiot journalist in idiot magazine.

      • red2black

        Laughable that the merest hint of regulation for the wealthiest is considered ‘totalitarian’.

        • oxenstierna

          I am equally amused that a policy recommendation which Mr Weyer admits is not even for Ed Milliband on a bacon sandwich day would get described as a mere hint of regulation for the wealthiest.

          • red2black

            You’ve lost me a bit with Mr Weyer and Mr Milliband on a bacon sandwich day, but I did mean wealthiest in the most general sense.

    • SimonToo

      The FTSE 100 may contain only 100 CEOs, but it contains many more executive directors than that. Nonetheless, it seems rather simplistic to limit these concerns to just this set of directors .

  • Colonel Mustard

    Payday loan outfits demanding 1,791% APR and banks offering 1.5-3% on savings.

    This country FUBAR.

  • ojfl

    That pay does not match performance is no reason to reduce pay but rather increase performance.

    • SimonToo

      Sweet. Replace executive option schemes with executive futures schemes, obliging them to buy the shares at a future date at a given price, win or lose. But how is that price to be set ?

  • Portendorfer

    Time for some shareholder power here.
    I have never subscribed to the view that CEO’s would go elsewhere and we would not get execs of quality without these crazy pay levels.

    • Andy

      Beef up shareholder power. That is the solution.

      • Portendorfer

        But how?

  • global city

    I would rather that the corporates felt pressure from the competition of new entry entrepreneurs than for their companies to be cosseted and regulated, including to the absurd level of controlling pay.

    it is the statist/corporatist nexus that has enabled these companies be be arrogant, knowing that their friends in power are going to restrict their competition from hurting them.

    It is also a vital reason why the EU-zone is mainly going down the pan.

  • MikeBrighton

    Executive pay in private companies is the concern of its renumeration committee and it’s shareholders. Anything else is socialism.

    • Ricky Strong

      Very true.

    • LadyDingDong

      I would consider myself one of the most fervent anti-socialists here but if you think that rem committees can control exec pay then you are deluded. I was involved in the biggest IPO in US history, the Visa flotation, and for an example of corporate greed, few would be better. The first board meeting approved the purchase of 2 corporate jets, one a Gulfstream G5, and awarded shares and option to the second-rate executive management that gave the CEO around $20 million a year. Board members got $250,000 a year and options for 12 board meetings and were not going to rock that lucrative boat. The only measure of success was a growth in EPS but Visa had grown steadily in the past as an association and was not going to stop growing because of a bunch of carpet bagger executives whose only interest was in self enrichment. I am capitalist to the core but the actions of the managers , not the owners, of businesses is of profound concern and needs to be addressed.

      • Augustus

        You are entirely right in your description of corporate greed in many cases by overlarge boards and inefficient management etc. But I still say that for anyone looking for individual companies to invest in today the addition of a star chief executive (CEO)’ who is replacing board control by often inefficient consensus management, is a good place to look. If these CEOs understand that their role is to maximise the return on capital, have good track records in achieving set targets, and can provide direction to changing circumstances, whatever their remuneration package may be will probably offer good value.

        • LadyDingDong

          You are not wrong, but in Joe Saunders, the Visa board (of Bankers would you believe) chose a man as CEO who, in his previous two roles had presided over failed financial institutions: WaMu and Providian. Great reward for failure. And the jet was hardly used for business but was the ultimate corporate status symbol.

          • Augustus

            Yes indeed, ‘great reward for failure’ on appointment. But he does appear to have succeeded with Visa Inc. and the IPO, if the performance in the company’s share price is anything to go by (250% growth has been quoted).

        • Iain Hill

          What a sad and shallow view of life!

          • Augustus

            What a silly comment! So what makes a good company? You can focus on the product, or profit margins, and growth, but you should also definitely pay attention to the single most important factor in the equation: Management competence. The absence today of any meaningful British-owned car manufacturer, for example, is due almost entirely to bad management. Overlarge boards, sometimes in faraway offices, were stuffed with apparatchiks. Production lines were inefficient, marketing worse, and design often terrible. The same happened a few years later in America. There, the big three (Chrysler, Ford and General Motors) embarked on an equally prolonged suicide mission, producing terrible cars at huge cost, which they couldn’t even give away. It’s by no means a superficial exercise, from an investor’s point of view at least, in looking for a talented CEO at the top of a company able to perform.

      • HookesLaw

        Capitalism is not an unregulated environment. Capitalists can make bad choices. Its plausible to think that business jets can be a good alternative Business Class.

    • Blindsideflanker

      Well not robber baron capitalism, which is what we are getting with corporate pay, and anyone who believes in free enterprise does themselves and their cause no good by protecting this avaricious greed.

      Remuneration committees are at best ineffectual , but more likely set up so that they chase pay rises for the board in a circular race.

      Shareholders though the owners of companies have been marginalised, their votes on pay aren’t even considered binding on the board.

      If we want to stop this leap frogging greed.

      Firstly shareholders votes should be a binding decision.

      Secondly There should be clarity in the way institutional investors are voting and who in that corporation made the decision. We should be able to find out if pension fund managers are looking after their investors, or perhaps doing a favour for their University mate.

    • kidmugsy

      He’s not discussing private companies, but public companies: the big, listed jobbies. And his point is that the executives pillage the shareholders, as indeed they do. Corporate governance law needs a review. So too does the tangle of laws that promote indirect ownership: Joe Bloggs doesn’t own GSK, but all sorts of institutional investors purportedly do so on Joe’s behalf – pension funds and so on.

      • Tom M

        You are correct but Mike Brighton has a point. Whether by the rem committee or not it is the shareholders who can wield the power if they are unhappy. I know of no pressure group of shareholders lobbying the government for a legislation change to give them more power over executive pay.
        Whilst I might also think some people are getting paid too much I have the greatest misgivings in letting politicians try to find a solution imposed by law.

      • HookesLaw

        I suspect its ‘private’ as in none state run. A fully ‘private’ company would not have remuneration committees but, as in ‘public’ companies, they would still have shareholders. So the point is valid even in your version of the scenario.

        ‘We’ (thats the word in the headline) do not pay executives. We simply buy goods and services.The issue should be our ability to make choices.

    • Iain Hill

      What about our pension funds?

      • SimonToo

        Our pension funds are major shareholders, but all too often their funds are managed by corporations whose senior managers have no interest in curtailing executive pay – indeed, quite the opposite. Similarly with the many private investments which are managed through nominee companies.

        On top of the conflicted interests of many of those acting for shareholders, there is one other problem. One can see that directors as a class are overpaid, but how does that help decide how much to award a particular director. After all, not every director is necessarily overpaid.

        Who stands for membership of remuneration committees, who actually gets chosen, what is their background and how are they to decide on the appropriate level of remuneration for an individual director ? Practically, the most they can usually achieve is to ensure that the pay of the directors is aligned with the interests of the shareholders. No one has yet worked out how to reduce the overall level of directors’ remuneration.

        The motor of remuneration inflation is often said to be not so much the absolute amount the director receives but rather more the satisfaction of knowing he gets more than his rivals. It is not a very free market idea, but if an Act was passed for a one-off reduction of the remuneration of every director of a Plc to 2/3rds of its current level, the pay burden could be lowered whilst competitive instincts remained satisfied.

      • mohdanga

        If the top 100 executives’ pay was decreased by 50% the impact on overall return of pension funds would be negligible. Not disagreeing that some pay packages are excessive but let’s be realistic. This kind of regulation mongering is what politicians love because it deflects attention away from the tens of billions of taxpayers money wasted every year by gov’ts.
        Where are the calls for regulating footballer and entertainment salaries? These are in the stratosphere compared to the average wage earner but nary a peep from outraged pols and media.

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