View from City Road: Big is beautiful - at least for the executives

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Coopers & Lybrand's study finding that half of all mergers and acquisitions fail to meet their financial targets is only the latest in a long and depressing list of research coming to much the same conclusion.

There is no hard evidence that mergers lead to higher profits, higher share prices for the predator or even efficiency gains. The only sure-fire winners tend to be the shareholders of the victim company and the financial and legal advisers.

Given this dispiriting history, why do companies persist in acquisitive behaviour the merits of which are so unproven? There is certainly the fun of the chase. Few events in the business world make the adrenalin run higher than a hostile bid. But the real reason is revealed by a study from the London School of Economics - for top people, size pays.

The bigger the company, the bigger its executives' pay packets. In an exhaustive look at the relationship between the top 300 UK companies and their directors' pay, Paul Gregg and his colleagues found that directors received exceptionally high pay rises throughout the Eighties but there was no relationship between pay and performance. The factor that determined pay was sheer scale.

There is an additional twist that suggests that boardroom pay may spiral out of control. Companies want to attract above-average managers, and therefore sanction above-average pay. But this year's above-average pay for one company merely boosts next year's average pay for another. Not everyone can earn more than the average.

This is a matter of public interest. If Britain's most important decision- makers are given large incentives to behave inefficiently, no macro-economic tinkering or industrial policy is likely to put things right.

Institutional shareholders can help to stop the pay chase by arguing for lower base pay combined with higher bonuses linked solely to outstanding performance (say, in the share price relative to the company's sector). The Government could help, too, by insisting that all directors' contracts are made public, even if they run for less than a year.