David Prosser: The problems with tackling executive pay

There is no doubt that today's report from the High Pay Commission will strike a chord with many people – and not just the increasing numbers of protesters supporting such campaigns as Occupy London. The decoupling ofexecutive pay from the remuneration of the rest of the workforce began well before the credit crunch, but in an age of austerity, widening inequality is all the more divisive.

Still, these issues are deceptively simple. The first challenge for the High Pay Commission and other campaigners is to decide what really worries them.

Is it the absolute level of the rewards paid to senior executives, or the way in which those rewards are decided?

In the case of the High Pay Commission, it appears to be mostly the latter. Most of the reforms it suggests (though not all) would require companies to think much harder about how the pay of their management is decided upon. That is not the same thing at all as making a bald assertion that there is such a thing as a salary that is too high.

In that sense, today's report will disappoint many people – those who believe it is simply wrong for, say, former Barclays boss John Varley to earn £4.3m, 169 times more than the average British worker.

Still, pay reform requires realism: even if, as the High Pay Commission points out, the ratio between the pay of the boss of Lloyds Bank and his average employee has risen from 14 to 75 over the past 30 years, it seems highly unlikely this Government – or any future one – would place a legal cap on such a measure, let alone set maximum salary levels.

Persuading the Government to force companies to do more to properly align the interests of managements and shareholders is a more hopeful prospect, however. Thequestion is: how best to achieve those ends?

What we should strive for is a governance system that empowers remuneration committees – no matter who sits upon them – to exercise the judgement for which they were appointed.

Rather than hiding behind a pay formula, complicated or otherwise, these committees should decide for themselves what to pay management – and defend their decision whether it is unpopular with executives or the wider workforce.

These aspirations are difficult, however, which is one reason why executive pay has continued to spiral despite well-intentioned attempts to tackle the problem.

In the end, capping pay, or pay ratios, might be near impossible politically, but it would be a much more direct way to tackle the problems identified by the High Pay Commission.