Bill Gleeson: Sauce for goose not always sauce for the gander

Oct 31 2007 by Bill Gleeson, Liverpool Daily Post

I DON’T often find myself in agree-ment with the TUC. Most of what they have to say is predictable left-wing, knee-jerk rubbish. Executive pay, however, is an exception.

Do you recall when, about this time last year, inflation touched the 3% mark and there was concern the Governor of the Bank of England could be forced to write a letter to the Chancellor of Exchequer explaining what he intended to do about it?

Some members of the Bank’s Monetary Policy Committee told me they were concerned that inflation could prove a tougher nut to crack than many anticipated. One of the keys to lower inflation rates was, they said, low pay settlements this year.

So it is all the more controversial then that a survey of top executive pay published this week shows it has doubled over a five-year period, while the rest of the country has been accepting more meagre rations.

The sense of one rule for the masters and another for the rest of us was underscored yesterday with the news that Stan O’Neal, chief executive of Merrill Lynch, was sacked with a £73m golden handshake, despite the fact the American bank has incurred its biggest losses ever.

The earnings of Britain’s top company executives have reached a new record of more than £3m each because of ever-increasing incentive payments, according to analysts at Incomes Data Services.

Over the same period, the average earnings of full-time workers across the country rose just 20%.

It is not surprising, therefore, that TUC general secretary Brendan Barber accused Britain’s top directors of possessing no shame. Year in, year out they have been paying themselves big rises while lecturing the rest of us on the need for low taxes. “It beggars belief that they are somehow working twice as hard as five years ago,” Mr Barber said.

Nor is it just the TUC voicing concern. The IDS report said pay experts were now questioning the current level of boardroom earnings, adding that calls for action to limit wage growth were increasing.

A recent poll of pay experts by IDS found more than half thought executive directors were overpaid and two thirds believed wage differentials were too wide.

Nor is high pay the preserve of just the biggest companies. The study also found that earnings for chief executives of the FTSE 250 firms have increased by 90% since 2001 to an average of £1.4m each.

The salaries of directors in FTSE 350 firms rose by 9.3% in the past year alone compared with wage settlements across the economy as a whole of 3.5%.

Chief executives in FTSE 100 firms were paid average salaries of £737,000 in the last financial year, but total earnings averaged almost £3.2m when incentive payments and share options were added.

It is no surprise that the earnings of top directors continue to escalate, given what’s been happening to the design of incentive schemes.

The potential maximum awards from all types of incentive scheme have all been edging up during the past few years and the rewards are now being received today.

The bonuses are almost universally linked to rises in company share prices and dividends. In the past few years the stock market has been performing relatively well, despite the recent jitters. A strong market will lead directly to higher pay, irrespective of how well any one executive is running his or her company.

Such arrangements, however, lead to short-termism in the boardroom. Cost cutting and other short-cuts to profitability get more attention than long- term growth strategies, which is profoundly damaging to the economy.