'Free market principles undermined by executive pay'

The "excessive" pay levels of Britain's top chief executives amount to a "perversion of market principles" because they bear little risk, according to a hard-hitting analysis by the independent Work Foundation.

Growing pay inequality, with top directors getting pay rises of 10 times the inflation rate, "corrodes the basic concept of fair reward that underpins a thriving society", according to the report's author.

Nick Isles, a director of the non-aligned and charitably-funded foundation, said such huge increases in boardroom rewards could also damage the performance and long-term success of organisations because staff become "cynical and disillusioned".

The average remuneration of chief executives at FTSE 100 companies increased by 28 per cent in the year to the summer of 2006, the report says. This compares with an inflation rate of 2.8 per cent and an average wage increase across the economy of 4 per cent. Researchers found average pay among the senior directors topped £2.4m, up £300,000 on the previous year.

Turnover of the chief executives - an indicator of job security and therefore of "risk" - was 14 per cent in the year to July 2006 compared with a national average of 18.3 per cent and 22.9 per cent in the private sector.

Of the 14 chief executives who left their jobs during the year, just one was ousted. However the blow to Ian Russell at ScottishPower was softened with a £5m pay-off. That is 1,350 times the £3,700 severance payment a man on average male earnings of £25,800 a year would get if he had an average tenure of 7.5 years.

The paper contends that the old arguments about risk and reward often used by those seeking to justify growing chief executive pay packets "cannot be sustained".

Mr Isles said: "People instinctively understand the difference between risk-taking entrepreneurship and able stewardship of an organisation. What our findings show is that the levels of risk borne by CEOs are actually quite modest."

Chief executives suffer little more risk of being fired than the average worker, he said. "In addition, they will tend to live longer and are cushioned from falls from grace by large pension pots and sizeable pay-offs.

"The personal consequences of failure for the ordinary worker are usually greater than they are for the person who is often most responsible for that failure. Reward should go to the talented, the able, the entrepreneurial and the wise. But let us not base arguments about reward on myths about risks that are not actually present.

"A winner-takes-all market has developed among top CEOs and nothing seems able to stop it. If we pay our top public servant - the Prime Minister - £186,000 a year, why do FTSE 100 CEOs deserve more than 15 times that for stewarding their companies? The basis for paying such large and inflationary pay increases to CEOs is a perversion of market principles."

The paper calls for a more progressive taxation system to put a brake on excessive pay and argues for the setting up of a High Pay Commission, modelled on the Low Pay Commission. This would set benchmarks and make public recommendations to company boards. Representation on the boards should include workers and other stakeholders.

A spokesman for the CBI said the period of the study was not representative. "At the last count, the average tenure of a FTSE 100 chief executive was in fact less than four years, and falling. The reality is, in an increasingly global economy where there is fierce competition for senior-level talent, companies have to pay more to secure the best person for the job. Having the right top team in place can mean the difference between success and failure for companies and their staff."