Philip Thornton: Bloated bonuses are no way to reward success

Just one FTSE 100 chief executive was made redundant - and he got a £5m pay-off

Share

Big business's refrain over executive pay is so well rehearsed that it has become a mantra the rest of the workforce can probably recite off pat:

These people work exceptionally hard and take risky decisions that should be rewarded just as failure will be rewarded with the sack. There is a global market for talent and businesses must pay the going rate. And whatever one feels about the payments it should be up to shareholders, not ministers, to set boardroom pay. Well, up to a point, Lord Copper - or perhaps more accurately Lord Browne, who received £3.3m last year for his job of running BP.

In fact, arguments about rewards for success do not hold water. Research by the Work Foundation, an apolitical organisation, shows that chief executives face less risk of losing their jobs than their workers. One in seven companies changed CEO over the past year compared with one in four of their workers. With executive pay rising 28 per cent a year, they certainly have little incentive to leave of their own accord.

Nor do the penalties for failure look that steep. The Work Foundation could find only one chief executive who was made redundant - and he left with a £5m pay-off. An ordinary worker can expect 0.58 per cent of their annual pay - or two days pay.

Of course, the UK is part of the globalised world. But, while that has led to a fierce war between companies to hire the best executives, the opposite is true further down the ladder. Thousands of workers have seen their jobs outsourced to countries such as India. If the job itself can't be moved, companies are happy to bring in workers from Poland. This used to apply to plumbers and call-centre workers but now affects lawyers, bankers and architects. With unemployment rising, it won't be long before it becomes an issue at the ballot box.

Sadly, shareholder power is a myth when it comes to executive pay. The pay packages are set by non-executive directors who themselves are executives at other companies. The typical shareholder is no longer Sid of British Gas privatisation fame, but giant investment bodies that hold large chunks of the voting power of FTSE companies.

Over the coming weeks, some £18bn of bonus will be handed out to a select bunch of workers. Half of that is heading towards workers in the City of London. Even leaving aside the City, the rate of increase of the rewards for the directors of the largest UK companies far outstrips that of their employees. Research by another apolitical research body, Incomes Data Services, shows the gap between the boardroom and the shop floor has doubled since the start of the decade.

The TUC looks intent on making 2007 the year of the backlash against executive pay. It points out that, while company pay packets have doubled after inflation since 2000, ordinary employees have enjoyed a rise of just 6 per cent.

Brendan Barber, its general secretary, has called for a national debate. Frankly, that is a bit feeble. There are strong economic arguments on both sides over which agreement will never be reached. Critics highlight the "obscenity" of such a wealth divide which appears to have no justification in productivity and which has created a parallel economy, particularly in the London housing market. Advocates of a free market will warn that deterring successful managers and entrepreneurs coming to the UK will simply weaken the economy in the long run.

The fact of the matter is that pay is an issue of public policy. What is needed is action rather than more debate. The Government sets a minimum wage and makes it clear what wage increase it thinks that lowly paid nurses and teachers should get. The spotlight must now fall on the top earners.

This Government should be praised for doing more than its predecessors to force boardrooms to be more accountable to shareholders. The failure of the current system is not the size of the sums involved - although those can be breathtaking - but the lack of a link between what they earn and the performance of their companies.

There are two first steps the Government and the companies themselves must take. First, terms of service should be cut to ensure departing directors cannot claim vast sums in lost earnings. And, allied to that, boards must make basic pay a smaller share of the total package and increase the amount linked to performance targets.

In the US, basic pay makes up just 16 per cent of remuneration. The equivalent figure in the UK is 59 per cent. Surely, bringing executive pay into line with performance is following free-market rules rather than upsetting them. The City shouldn't be able to argue with that.

p.thornton@independent.co.uk

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Maths Teacher

£110 - £200 per day: Randstad Education Leeds: Secondary Maths Teacher for spe...

Business Analyst - Surrey - Permanent - Up to £50k DOE

£40000 - £50000 Per Annum Excellent benefits: Clearwater People Solutions Ltd:...

***ASP.NET Developer - Cheshire - £35k - Permanent***

£30000 - £35000 Per Annum Excellent benefits: Clearwater People Solutions Ltd:...

***Solutions Architect*** - Brighton - £40k - Permanent

£35000 - £40000 Per Annum Excellent benefits: Clearwater People Solutions Ltd:...

Day In a Page

Read Next
Women are working in some of the lowest-paid sectors such as cleaning, catering and caring  

Women's wages have gone backwards. Labour would give women the pay they deserve

Gloria de Piero
 

Taking on Ukip requires a delicate balancing act for both main parties

Andrew Grice
Wilko Johnson, now the bad news: musician splits with manager after police investigate assault claims

Wilko Johnson, now the bad news

Former Dr Feelgood splits with manager after police investigate assault claims
Mark Udall: The Democrat Senator with a fight on his hands ahead of the US midterm elections

Mark Udall: The Democrat Senator with a fight on his hands

The Senator for Colorado is for gay rights, for abortion rights – and in the Republicans’ sights as they threaten to take control of the Senate next month
New discoveries show more contact between far-flung prehistoric humans than had been thought

New discoveries show more contact between far-flung prehistoric humans than had been thought

Evidence found of contact between Easter Islanders and South America
Cerys Matthews reveals how her uncle taped 150 interviews for a biography of Dylan Thomas

Cerys Matthews on Dylan Thomas

The singer reveals how her uncle taped 150 interviews for a biography of the famous Welsh poet
DIY is not fun and we've finally realised this as a nation

Homebase closures: 'DIY is not fun'

Homebase has announced the closure of one in four of its stores. Nick Harding, who never did know his awl from his elbow, is glad to see the back of DIY
The Battle of the Five Armies: Air New Zealand releases new Hobbit-inspired in-flight video

Air New Zealand's wizard in-flight video

The airline has released a new Hobbit-inspired clip dubbed "The most epic safety video ever made"
Pumpkin spice is the flavour of the month - but can you stomach the sweetness?

Pumpkin spice is the flavour of the month

The combination of cinnamon, clove, nutmeg (and no actual pumpkin), now flavours everything from lattes to cream cheese in the US
11 best sonic skincare brushes

11 best sonic skincare brushes

Forget the flannel - take skincare to the next level by using your favourite cleanser with a sonic facial brush
Paul Scholes column: I'm not worried about Manchester United's defence - Chelsea test can be the making of Phil Jones and Marcos Rojo

Paul Scholes column

I'm not worried about Manchester United's defence - Chelsea test can be the making of Jones and Rojo
Frank Warren: Boxing has its problems but in all my time I've never seen a crooked fight

Frank Warren: Boxing has its problems but in all my time I've never seen a crooked fight

While other sports are stalked by corruption, we are an easy target for the critics
Jamie Roberts exclusive interview: 'I'm a man of my word – I'll stay in Paris'

Jamie Roberts: 'I'm a man of my word – I'll stay in Paris'

Wales centre says he’s not coming home but is looking to establish himself at Racing Métro
How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?

A crime that reveals London's dark heart

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?