Directors deserve high pay, but not without shareholder approval

The huge pay increases for company directors have been an enormous source of resentment in recent years. Given the bitter feelings that the subject stirs up, any tackling of the problem can be seen as brave - at least if the attempt does not drown in its own populism.

Under the proposals revealed in The Independent today, the Secretary of State for Trade and Industry, Stephen Byers, will seek to clip the wings of the mega-wealthy by insisting that companies ask shareholders to vote on directors' pay packages. Under the terms of the Greenbury code on corporate governance, introduced in 1995 - in the wake of all the concern about fat-cat salaries for the directors of the privatised utilities - it is optional for businesses to permit votes on directors' remuneration. Only a few bother. Sometimes, coaxing must give way to coercion.

Mr Byers began a consultation process last year on bosses' pay. It now seems that a tightening-up of procedures is inevitable. The new code of the Financial Services Authority will mean that companies must invite shareholders to vote on the remuneration packages, although a more radical option that would allow the shareholders themselves to move a change in directors' remuneration seems to have been put on hold.

One does not need to subscribe to the Gordon Gekko greed-is-good philosophy to understand that generous remuneration packages are an inevitable and even essential part of a modern economy. In some respects, the Government seems to be grasping for empty populist compliments. It is true that the differential between average and chief executives' salaries is greater in Britain than elsewhere in Europe (though still less than in the United States). But it is also true, as Mr Byers himself has pointed out, that it is necessary "to pay world-class salaries to world-class directors". Not so long ago, such sentiments could have been heard only from the lips of diehard Thatcherites. Now, self-evident truths about the necessity of competitive salaries are at last accepted.

It is important, though, that shareholder apathy should not be allowed to take hold. The big institutional shareholders often steer clear of criticising salary packages, even when the package cannot be realistically justified. The contribution of a brilliant chief executive can hardly be overvalued: however great the executive's salary, it will scarcely make an impact on the company's overall balance sheet. Equally, however, there are occasions when the big shareholders should take notice of the lacklustre performance of highly paid managers.

Nearly a third of chief executives in Britain's top 350 quoted companies had salary and bonus rises of more than 20 per cent last year. Matt Barrett, the chief executive of Barclays - who is receiving £1.3m for three months' work, with possible bonuses of up to £30m, and was, unsurprisingly, barracked by protesters at the bank's annual general meeting yesterday - provides a vivid example of generous pay deals that are hard to justify.

With luck, Mr Byers's new recommendations will tread the fine line between meaningless fat-cat-bashing, on the one hand, and allowing executives to spend millions on themselves without regard for their companies' financial health, on the other. It will, however, be a very fine line.