A few weeks ago I wrote about executive pay and the growing discontent amongst the public and shareholders alike regarding the gap between executive pay and the rest of us.
The key for me is not only the scale, but also the vacuum in which some remuneration committees appear to have been operating: dire performance is being heftily rewarded in some quarters.
Simon Walker, Director General of the IoD has been vociferous in his criticism of excessive executive pay. This week I will use my article to pass on some of his comments.
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“A 2010 ComRes poll for BBC Radio 4 revealed that the public at large believed FTSE 100 executives only deserved to be paid one seventeenth of their actual remuneration. These are not the views of unreconstructed hardliners. In fact, the reality is far more troubling – these are the customers and employees of many of those FTSE companies.
“ComRes’s finding, of course, should not be interpreted as a perfect reflection of what people would accept business leaders being paid; rather it is a symptom of a widespread discomfort, some of which is developing into discontent.
“The man in the street is not alone, either. The Association of British Insurers, Britain’s most powerful shareholder group and not an organisation known for its anti-capitalism, recently issued an ‘amber top’ warning over remuneration packages being proposed at Barclays, indicating significant concerns.
“It is not hard to see why this has occurred. These are not concerns conjured from thin air. The fact is that many FTSE executives are paid more than the performance of their companies really justifies.
“Consider the performance of Barclays. At the time of writing, the bank’s shares are trading well below net asset value. Is that really the kind of performance that in any way merits Bob Diamond’s proposed £17m package?
“Nor is such a disparity between performance and rewards unusual in the FTSE 100, according to the annual studies carried out by Manifest and MM&K. Between 1998 and 2010, chief executives’ remuneration more than tripled, whilst any improvement in share price was almost invisible. From 2009 to 2010, CEO remuneration rose by 32%, despite the FTSE 100 only rising by 9%.
“So the public are not being unduly radical – they are simply seeing the evidence and drawing the understandable and accurate conclusion that this is undeserved. This is harmful to the reputation of business and the capitalist system in which we operate.
“The underpinning of the whole ethos of our system is that if you do well, you are rewarded well. If those at the very top are seen to be rewarded well without the corresponding level of performance, then the impact on business as a whole will be severe.
“Government minister David Willetts rightly identified that a sense of “reciprocity” is crucial to business success – customers, employees and the wider population must have a feeling that business is a member of the society in which it operates. The alternative, of course, is that it is a parasite, something to be resented.”
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And coming back to my personal views, it is a real concern that business is perceived as a parasite. There is no doubt that there are some parasitic businesses and business people out there. The mess that we find ourselves in is due to a small but influential part of the business community that fed – and continue to feed – on the woes of the majority.
However, the UK economy is a propped up by thousands of hardworking owners of small- to medium-sized businesses. These organisations play an important role in their local communities and the nation as a whole through the tax system; it would be a great shame if an overpaid and underserving minority tarnished the name of business for the rest of us.
Tom McCarthy advises on Mergers & Acquisitions for www.odysseycf.com and is Chairman of the Bristol Institute of Directors www.iod.com
