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The Institute of Directors, the free-market body representing senior company directors, yesterday defended big boardroom pay packages and blamed bad publicity about "fat cat salaries" for harming the image of business.

In a research paper Ruth Lea, who heads the IoD's policy unit, said she accepted there were legitimate concerns about pay but argued that big companies were right to award managers big pay rises as a fair reward for success.

"The nation's prosperity depends on them. If they perform their tasks well they should be suitably rewarded," she said.

"But all too often high pay packages have not been properly handled and this has led to the all-too-familiar media outrage which has hurt business's image. It is vital that pay packages are fully explained." Ms Lea said pay rises for directors were "within the range of European practice and well below those in the US".

The IoD found that small company directors' pay was relatively modest with the boss of a pounds 25m-a-year business earning pounds 52,000, plus a bonus of pounds 12,000. The head of a company with sales of between pounds 25m and pounds 200m earned on average pounds 82,250 plus a pounds 20,000 bonus.