Scot-free in the Square Mile

How does the City get away with its huge salaries, asks Peter Rodgers
If you want to find the nearest thing in post-Thatcher Britain to the old-fashioned idea of a socialist stakeholder economy, in which the workers take the lion's share of the rewards of their production, look no further than the City of London.

As the table shows, in the Square Mile it is certainly fair shares for the workers. Chief executives in the three City firms earn a far lower multiple of their employees' average earnings than in typical businesses elsewhere.

Furthermore, the poaching merry-go-round is under way again, driving up the earnings of many workers to higher levels than those of their chairmen and chief executives. Dozens of middle-ranking executives have been offered million-pound-a-year packages with guaranteed bonuses in a recruiting frenzy led by Deutsche Morgan Grenfell.

City firms typically have salary bills of around two-thirds of their total expenses, and in a good year bonuses paid to staff are often comparable in total to the profit left for shareholders. Most firms' main preoccupation at the moment is to keep bonuses under control so that there is something left for shareholders at the end of the year.

Yet despite all this money sloshing around, the City has been almost immune to the great fat cats scandal. This is rather surprising given that hundreds, if not thousands, of dealers, analysts and corporate financiers are earning more than the chief executives of most of British industry.

It may be that the public and the media believe that normal standards do not apply to a part of the economy whose only link with the rest of Britain is that it happens to occupy a corner of the capital.

Or perhaps there are other less obvious mitigating factors. Barrow boys really can don coloured jackets and make a lot of money and City people genuinely do get sacked instantly if they underperform. They may be closer than they realise to pop stars and footballers in public perception than the resented fat cats of the utilities.

There is no sense, as there was 30 years ago in the stockbroking fraternity and 10 years ago at Lloyd's, of a City of late starts, long lunches and easy money, and much of the City is certainly now a tough meritocracy. If there is public indifference to the high earnings of the City it may be because the money is perceived, rightly or wrongly, to be closely tied to individual performance.

There is a lesson here for the rest of corporate Britain. The Greenbury report on executive pay, published a year ago, did not achieve what its supporters in government hoped, which was to defuse public criticism of executive pay. In part, this is because of mistaken beliefs about what the Greenbury committee set out to do. It was never intended to put an end to large pay rises. Its objective was to make the process by which pay is set fairer and more transparent, and in particular to link incentive schemes and bonuses as closely as possible to performance.

As a result, the Greenbury recommendations also gave a new lease of life to the executive remuneration consultancy business, spawning masses of long-term incentive schemes for senior executives, supposedly bringing high rewards for high performance.

Typically, the schemes see performance in terms of measures of shareholder value, ranging from the company's share price relative to the FT-SE 100 index or a peer group to growth in earnings per share or total shareholder return.

There is much to be said for linking executive rewards directly to shareholder interests, though the complexity of some of these schemes is a cover for performance targets that are so undemanding the companies concerned might as well have stuck with old-fashioned share options.

The flaw in almost all the plans, however, is that they ignore the wider issue of the public acceptability of the enormous bonuses that will be awarded when the first of the new long-term schemes mature towards the end of the decade. If 1995 was known as the year of the fat cat scandal, 1999 will put it in the shade.

Where most of the new schemes fail is that they do not clearly demonstrate a link between executive pay and performance standards that the community at large recognises.

Most of the schemes are hideously complicated, and even brief summaries occupy pages of the 1996 crop of annual reports. This may not matter for the GKNs and ICIs, which do not have large customer bases and whose chairmen's salaries usually only surface in the City pages. But it does matter for any company dependent for its cash flow on millions of individual customers - in particular, the utilities. They should be thinking seriously of linking their pay to customer service performance as well as shareholder return if they want to restore their damaged credibility.

If water company directors paid themselves bonuses linked to shareholder return, offset by penalties linked to water leakage or the frequency of hosepipe bans, then there would be much less room for criticism.

There is one utility that, to its credit, has pioneered a link with performance. Railtrack directors' long-term bonuses are set by multiplying a factor based on growth in earnings per share by a performance index based on the punctuality of train services.

Total long- and short-term bonuses at Railtrack could add 140 per cent to basic salary if all the targets are beaten. But poor service on the railways would slash the payout to the directors.

Such is the complexity of the Railtrack scheme that it is not possible to say yet whether it will work as effectively as promised. But if a bad year for service to the public is seen substantially to reduce executive pay, it would transform public perception of utility fat cats.

Research by Diana Koshel