Outlook: Fat cat pay

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The Independent Online
IF THERE is one thing even more guaranteed than a ban on fox hunting to please the neglected grass roots of Old Labour it would be a crack down on "fat cat" pay. On cue, Stephen Byers, Secretary of State for Trade and Industry, has announced that utility regulators will be obliged in the forthcoming utilities bill to penalise managements that pay themselves too much. Anyone would think Mr Byers was after John Prescott's job, the way he keeps playing to the left.

A way will be found of linking pay directly to standards of service, Mr Byers is quoted as saying. One such method might be more onerous price caps for companies that are seen both to be paying their executives too much and delivering poor quality of service.

Presumably Mr Byers' remarks are largely political rhetoric, for it is hard to know how in practice such a link might be made. Some form of definition of "excessive pay" would have to be advanced, as would a defining set of circumstances for poor quality of service.

Regulators would be very reluctant indeed to adjudicate in an area they at present regard as beyond their brief. It is questionable, in any case, that regulators and ministers would have any legal right to interfere as proposed. As things stand, directors of PLCs are answerable for how much they pay themselves not to parliament or government, but to shareholders, the owners of the business.

The problem Mr Byers implicitly identifies is that in the case of monopoly utilities, shareholders have no direct interest in quality of service, as they obviously do in companies that operate in fully competitive areas of the market - rather the reverse. The more a company exploits its captive customers, the more profit there is for shareholders, subject only to the nuclear sanction that the licence might be revoked if things really begin to slide. Ergo, if pay is linked to financial, rather than to service performance, as it invariably is, then executives have a positive incentive to crunch the customer.

No right-thinking person would quarrel too much with this analysis. Executive pay in the utilities has risen since privatisation by far more than can reasonably be justified either by the improvement in service customers have received, which in many instances is marginal, or by the admittedly rather greater gains that have been made in efficiency.

In a fully competitive industry, many of these managements would by now have failed. Their share prices would have collapsed and they would be out of a job. Instead they continue to enjoy handsome salaries and fringe benefits, further inflated by share option and long term incentive plans. In some respects, then, Mr Byers is right to believe the demands of the left can be reconciled with the rigours of free market thinking. Finding a legitimate way of doing it is another thing entirely.