Why should a racing driver earn more than a bank boss?

Because his earnings are set by a genuinely competitive market, writes Hamish McRae. Not so the top salaries in privatised utilities, where the `market' is clearly rigged
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The Independent Online
Something has happened in our society's attitude to top people's pay. Politicians do not like to make U-turns unless they think they have to, but, equally, they are sensitive to the twists of public concern. That John Major should now be prepared to take action on the pay of directors of privatised utilities marks a turning-point not just in the Government's attitude to top salaries but also in the attitude of us all. We are a society based on consent and our consent for directors of these utilities to set their own pay has been withdrawn.

There is an obvious temptation to depict this change as marking the first stage of a retreat from the Eighties free-for-all, and in a way it is. But it is hard to see any return to the types of constraint of the Seventies. The very idea that it should be possible to impose a voluntary limit on pay increases of £6 a week - that people would accept, without even the need for legislation to enforce it, a decision by the state as to how much their pay should rise - is unthinkable now. It is not just that we no longer have the social consensus to go along with such a policy; there have been far-reaching changes to the world economic and financial systems which make it very difficult for any one country to impose a pay policy on its citizens.

Nor is there any real drive to do so. One of the most interesting aspects of the present concern about top people's pay is that it is very specific: there is no general revulsion about people being well-paid where there is a real market for their services which sets that pay. The concern is focused on the earnings of a relatively small number of bosses of privatised utilities, where large increases have been paid to people for doing exactly the same jobs that they did before privatisation.

This realisation that income is increasingly set by the market explains the very different attitudes we have towards the huge earnings of people in the various branches of the entertainment business and the rather smaller (though still hefty) earnings of people in the business world. Few would object to the earnings of Nigel Mansell or Naomi Campbell because both are set by the market. When Mansell switched from Formula One to Indycar racing, the world-wide television ratings of Indycar racing soared, while the size of the crowd at the British Grand Prix halved from 150,000 to 75,000.

As for Naomi Campbell, she is selling her personality to a world-wide market and since her presence will guarantee publicity in the world's media, she can justify her fees.

Much the same logic applies to the earnings of pop stars, footballers, best-selling authors, TV "personalities" and the like. There is no moral judgement involved: no one pretends that society benefits more from their activities than from nurses or teachers. The enduring effect of the market revolution of the Eighties was to teach us that if there is a genuine demand for a particular type of service, then the person providing it is justified in charging the rate for the job.

Many people may feel uncomfortable with the odd values that society seems to put on different skills, but at least the market, if it is functioning properly, provides a clear rationale for pay differentials. It is a form of democratic endorsement for those rewards: people pay to see Nigel Mansell or Naomi Campbell perform. The market can also be a harsh judge, for the rich pickings go hand in hand with enormous insecurity: there is no security of tenure in showbiz.

What sticks in the craw, what Mr Major, like everyone else, finds distasteful, is not that the market distributes its rewards in a capricious and amoral manner; it is rather that the market itself is rigged.

You can see this best by looking at the public criticism, or absence of it, of business figures. There has been no criticism of Richard Branson - or rather when Mr Branson is criticised it is because of his ballooning exploits rather than his income. This is surely because it is recognised that he operates in an immensely competitive world and has been improving the quality of service in the businesses in which he operates. Indeed, there is little criticism of the pay of senior industrialists in general, usually only when there appears to be a conflict between the performance of the business and the rewards of its top brass.

There is much more criticism of the pay of clearing-bank bosses, probably because banking is rightly seen as an oligopoly: there are too few big banks for there to be really fierce competition between them. (Lord Alexander, chairman of NatWest, probably earns less now in real terms than he did 10 years ago when he was a top barrister, but he catches more flak for it.) But the real opprobrium is reserved for the bosses of privatised utilities, where there is clear monopoly and when the increased earnings appear to be windfall gains stemming directly from a government decision to privatise.

So what is to be done? Something must be, for no democratic society will tolerate abuses of its system for long. But few people would countenance a return to statutory pay policies, even were this practicable. We accept that the market sets income, even if most of us would feel more comfortable about its rating of Miss Campbell than we would of, say, Nick Leeson.

There are three main paths forward. The first is to ensure as far as possible that the market is not rigged: that, for example, the salaries of people running utilities are linked more to those of civil servants than to those of managers in the harsh competitive world. For the moment, while these organisations sit between the protected world of public services and the normal commercial environment, salaries should reflect this. As greater competition is injected into these industries, then salaries should rise to reflect that.

This need to "de-rig" markets applies equally to the professions, notably law, whose practitioners should ask themselves whether they are artificially enhancing earnings by operating what amounts to a closed shop.

Second, there needs to be greater shareholder control. The fact that shareholdings in the UK are unusually concentrated in large institutions means it is possible to exercise such control. The action of organisations like Postel (the Post Office and BT pension fund) in curbing excessively lavish directors' contracts is a welcome sign that large shareholders are prepared to act more aggressively.

Third, there needs to be a shift in the moral climate to support these two market-driven changes. All societies, at all levels, need to exercise self-restraint if they are to function efficiently. Observing the law is not enough. It is easy to see the costs of a climate of excessive litigation by looking at the US. Real legitimacy comes not from the imposition of rules but by the acceptance that self-interest requires an element of restraint ... or, in the words of the Economist headline quoted in Samuel Brittan's new book Capitalism with a Human Face: "How to be ethical and still come top."