James Moore: Executive pay system is clearly broken, if not bent

One group seemingly immune to the impact of inflation, unemployment, economic stagnation and all the other woes afflicting this country is the men (it's usually men) who sit around the boardroom tables of Britain's biggest public companies. Income Data Services (IDS), which totted up pay, bonuses and various share awards, says FTSE 100 directors pocketed an average 49 per cent rise in the last financial year to bring their annual remuneration to an average £2.7m. Chief executives made do with a 43 per cent rise, poor lambs.

It would be easy, now, to launch into another rant about about executive greed and how their gargantuan earnings are scarcely reflective of the way companies have performed. That's true. But perhaps it would be better to focus on what can be done.

Executive pay is set by remuneration committees (Remcos), made up of non-executive directors who are supposed to oversee the activities of executives on behalf of shareholders.

Before setting pay awards, these people typically take advice from external "remuneration consultants", who look at what executives at companies in peer groups are paid.

Of course, this pushes the median up (because companies tend to use similar peer groups), hence the relentless pressure northwards.

The consultants usually come from large firms (like the big four accountants), which make an awful lot of money providing "advice" to companies. So they have little motivation to recommend anything other than generous rises for the people with their hands on the purse strings. The Remcos usually wave through their recommendations, not least because the people on Remcos usually hail from the same small circle of managers as the executives. These people see no reason to shake up a system which served them so well during their managerial careers. They also buy into the orthodoxy that says managers are uniquely wonderful people for whose services there is an international market.

It is a system that is clearly broken (if not bent). And as income disparity has been identified as a serious social problem, it is arguably unsustainable.

One way to bring about change might be to alter the composition of boardrooms, and seek non-executives from more varied backgrounds. German companies, for example, have at least 10 employee representatives on their boards. The very idea is enough to provoke howls of outrage from the business lobby here. So why is it that German companies (with the possible exception of its banks) are widely held to be among the best managed in the world?

In the meantime, perhaps the IDS figures will provide some impetus to the suggestion that advisory votes on remuneration committee reports are made binding.