Exclusive: Salaries for top executives are rocketing 'out of control'
A new investigation shows pay inequality is accelerating in Britain, with top bosses set to earn 215 times the average wage by 2020. It also demolishes the arguments they put forward to support their astonishing incomes
Sunday 15 May 2011
Britain's bosses are pocketing an increasing portion of the nation's income, according to a report from the High Pay Commission to be published tomorrow. As the majority of people in the country face the largest drop in household income for three decades, a tiny minority at the top are awarding themselves a growing slice of the UK's wealth.
The top one thousandth of the British working population currently receives 5 per cent of the country's earnings, a ratio equivalent to that in the 1940s, the report says. If these trends continue, income for the highest paid will account for 14 per cent of the country's total by 2030 – the same proportion as in 1900.
The independent commission was set up in November to scrutinise the rising pay of those at the top. Its first report concludes that during the decade Labour was in power, income at the top grew by 64.2 per cent, while that of an average earner increased by 7.2 per cent over the same period.
The study accuses businesses and governments of having "failed to tackle the dramatic growth in pay at the top" despite growing public anger at the gulf between soaring rewards for executives and tightening circumstances for the rest of the country.
The conclusions will be a blow to David Cameron's attempts to emphasise that "we're all in this together". The Government has appeared flat-footed in its attempts to persuade senior executives and bankers to curb the pay and bonuses they award themselves, particularly as the effects of the recession are still being keenly felt by the rest of the country.
Burgeoning pay increases to top bosses has been caused, in part, by attempts to link pay and bonuses to performance, the commission says. It also blames weak control of companies by their own shareholders.
Currently the average salary for the highest-paid CEOs is more than half a million pounds. By 2020 this figure is expected to be £1m.
Many of the largest pay packets have been awarded to those in the financial sector, who make up a third of the top 0.1 per cent. Their pay is boosted by bonuses and share options that far outstrip their base salary.
Chief executives of FTSE 100 companies earn an average of £3.7m – or 145 times the average wage. By 2020 they are expected to be paid 214 times more than the average.
The commission believes that if companies were forced to be more open about how much of their profits go to executives rather than shareholders, bonuses would be reined in.
Deborah Hargreaves, the chairman of the commission, said: "This is the clearest evidence so far that the gap between pay of the general public and the corporate elite is widening rapidly and is out of control."
Ms Hargreaves believes the importance of tackling high pay is as much an economic concern as a moral one. "You can express moral indignation but if all the rewards go to the top, who is going to get the economy going again when average wages aren't even keeping up with prices?"
The Business Secretary, Vince Cable, launched a consultation on corporate governance and executive pay last year, the results of which will be published next month.
Responding to the report, he said: "What is impossible to justify is the fact that differentials of income at the top end continue to increase even when it's not justified. When bankers are bailed out by the state and continue to demand bigger sums, that's what people find inexcusable. Clearly something needs to be done to strengthen shareholder responsibility in this area, because at the moment they're either abdicating it or not exerting it."
Increases in executive pay have drawn criticism from all parties. Before the election last year the Tory MP Kenneth Clarke said he was "astonished" that the British were "so quiet about the massive gulf that's opened between the very rich and the ordinarily paid over the past 12 years".
Despite the telephone number pay packets of executives, a report last week from the Institute for Fiscal Studies, showed that average income could fall by 3 per cent this year, the steepest drop since 1981, taking households back to 2004-05 levels.
Paul Johnson, director of the IFS, said: "We haven't seen average people being squeezed since at least the early 1980s. What we are going to see is that the incomes of the majority fall by 3 or 4 per cent, so when people see a squeeze on their living standards that may well impact on how they see the very top."
The Labour MP Anne Begg, the chairman of the House of Commons Work and Pensions Select Committee, said: "Families and hardworking people are being squeezed as the cost of living rises, and this Tory-led government's policies are not helping. While Labour is putting forward the ideas to strengthen communities and help the next generation do better, the Government's front-loaded cuts and VAT rise are putting the economy into the slow lane. The Tory-led government is hurting, but it's not working."
The undeserving rich?
Chief executive of Reckitt Benckiser
Paid £18.2m last year, 702 times the median national wage
The company behind household products such as Cillit Bang and Air Wick knows how to make its executives feel appreciated. To Becht's credit, his charitable donations are substantial. In 2009 he was the best-paid PLC employee in UK. He retires later this year, no doubt on a pension commensurate with his pay package.
Chief executive of British Gas
Paid £28m last year, 1,081 times the median national wage
As customers struggled to pay soaring gas bills last winter, Chapman was reaping the benefit. His basic salary of £1.14m and bonus of £1.6m were boosted by a further £5.26m from a long-term incentive scheme and £15.5m from share options which he exercised in September.
Chief executive of miner Xstrata
Paid £27m in 2009, 1,042 times the median national wage
Davies is one of the highest paid people in the FTSE 100. He has expanded the mining giant's coal assets, despite concerns of environmentalists. This summer the company tackles Friends of the Earth in court over plans to build the world's biggest mine in Australia.
Chief executive, Apax Partners
Paid £13m in 2010, 502 times the median UK wage
The private equity investment group behind such household names as the high-street chain New Look has seen its profits soar during the recession. Private equity groups have been accused by politicians and trade unions of "behaving like locusts" by "asset-stripping, slashing jobs and paying outrageous rewards".
Chief executive, Barclays
Income Up to £27m if his bonuses and shares pay out, 1,042 times the median national wage
Diamond did himself no favours when he said that "the time for remorse is over" and that bankers should stop apologising. After a salary of £250,000 and £6.5m in bonuses, he is also in line for a further £6.75m of shares that could pay out in the future. Share deals from the past five years yielded some £13.8m.
The myths the realities...
'Big money is needed to get the best chief executives'
That assumes most are brought in, when 59 per cent of CEOs in the FTSE 100 were already at the company for five or more years.
'Being a CEO is risky, so they need to be compensated'
Hardly. Only six CEOs left FTSE 100 companies in 2009, a turnover rate of 6 per cent, which is less than half the national average.
'Big pay packets are linked to business success'
What about the bumper pay for bankers that caused the crisis? Over the past 10 years, CEO pay has quadrupled while share prices have fallen.
'Big bonuses mean better results'
Not necessarily. Research suggests performance-related pay works 50 per cent of the time – and bonus culture didn't stop bankers leading us all to crisis.
'Without big pay packets, executives will be lured abroad'
Only one FTSE 100 company has had its chief executive officer poached by a rival in the past five years – and that was by a rival British firm.
'Our high pay is in line with other leading countries'
It is significantly higher than the rest of Europe – it is less than in the US, but its CEO pay is 170 per cent higher than the rest of the world.
'Highly paid people at the top boost a company's success'
Having a pay gulf between staff at the top and bottom of a company can damage personal and corporate relations. Just look at how popular bankers are now.
'Top earnings have always risen faster than average wages'
Until 30 years ago, the gap had been decreasing. From 1949 to 1979, the proportion earned by the top 0.1 per cent decreased from 3.5 per cent to 1.3 per cent.
'Top earnings rise at the same percentage rate as average pay'
No. The earnings taken by the top 0.1 per cent increased by 64.2 per cent in the past decade, while average pay went up by just 7.2 per cent.
'Attempts to regulate CEO pay would be bad for the economy'
When you pay disproportionately high rewards in one sector – such as finance – it is harder to attract good graduates into other vital areas of work.
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