Executive pay rises which are grossly in excess of the success of the company they steer make “people’s blood boil”, David Cameron, the prime minister, has acknowledged.
From what he said yesterday, it now appears clear that he intends to introduce measures which will seek to curb the rises and to lower the temperature of the body politic.
But the as-yet unanswered question is whether the moves, to be announced by the business secretary, Vince Cable and enshrined in legislative intent in this spring’s Queen’s Speech, will do the job.
That there is a problem is not in doubt. It cannot be right, according to recent research, that chief executive pay in 87 of Britain’s top 100 companies should have risen by 33 per cent over the last year to reach an average of £5.1 million when the stock market value of those companies has risen by only 24 per cent.
Even on that performance measure, there has to be a question mark over whether, at a time the ordinary workforce is facing pay curbs and households more widely are seeing the most rapid decline in incomes for nearly 40 years, any double-digit pay increase is justified. Such increases say, not just to company workforces, but to the wider public, that “we are not all in this together”. It is the antithesis of the mantra that helped Mr Cameron win power, and explains that his anger is real, not a cosmetic sop to public opinion.
A central measure broadly outlined by Mr Cameron yesterday was that precise details of the pay of the directors of public companies should be published and that shareholders should have the right to vote on these packages. It sounds right – shareholders are, after all, the company owners.
But the practical reality of publicly quoted company meetings is that the real shareholder power is held by the big financial institutions – pension funds in the main – who almost always vote with the recommendations of the board, resulting in passage of resolutions by Soviet-style majorities.
One problem is that executive directors’ pay has become the litmus test of whether they are good at their job. The bigger the pay package, the better they must be. A better definition of putting the cart before the horse is hard to find. Performance should come first, and then the rewards. Few would deny that a chief executive who increases profits and dividends – the primary concern of shareholders – deserves a substantial reward.
Mr Cameron is right to finger the merry-go-round “crony capitalism” system of executives of one company sitting on the remuneration committees of other companies as, in part, responsible for upwardly spiralling pay.
Cleansing of these committees so that they more closely reflect public and company interest ought to be part of his proposals.
Labour’s suggestion that there ought to be employee representation on these committees should not be dismissed out of hand. Perhaps also there should be consideration of appointing non-executive public-interest directors, charged with ensuring that company pay policies are aligned with the wider public interest. It is arguable that if they are not so aligned, damage will be done to the company, which is not in shareholders’ interests.