Leading Article: Golden rewards for boardroom failures

BRITAIN'S recession has bestowed an embarrassment of riches upon business leaders. Golden hellos, goodbyes and, for the failures, golden parachutes have comforted top executives who in harsher times might have felt tempted to head for the window ledge. Examples abound of loss-making companies paying chief executives fat salary increases. The latest offence to fair play is the disclosure that Gerald Ronson, a convicted criminal who led his Heron business empire to near bankruptcy, has been offered a contract worth pounds 1m a year. More routinely, it is jarring for many people to see company directors pocket 20 per cent pay rises - much the same as they have been receiving annually since 1980.

Such largesse might be more acceptable if these same executives had successfully prevented job losses, pay cuts and plunging profits. Unfortunately, there tends to be room in the lifeboat only for the boss. Salaries rarely reflect company performance. A recent study from the London School of Economics found that the always feeble relationship between executive salaries and earnings per share has broken down. Rather, the driving force behind directors' pay is company size: the bigger the firm, the fatter the pay cheque, encouraging takeover mania.

Instead, the emphasis ought to be on rewarding performance. A director's pay should be linked to how well a company's share does against those of similar organisations. That way genuine entrepreneurial achievement could be rewarded, possibly with exceptionally large, but justified, bonuses. Few would argue as long as shareholders and employees were better off. Business leaders are key decision-makers in the economy. It would be unwise to begrudge them incentives for outstanding success.

However, development of such incentive payments is likely to be slow under the present pay system, which operates along the lines of 'If you scratch my back, I'll scratch yours'. Remuneration committees, often comprising executives of outside companies, do the sums. Typically, they look at average salaries and bump them up to attract above-average managers. So the average rises. The process is like the frequent practice of writers reviewing each others' books, or Arthur Scargill awarding the rail workers a pay rise while Jimmy Knapp works out how big an increase the miners deserve.

Companies sometimes waste their money: they may eventually pay the price of imprudence. One could also discount criticism of boardroom excess as the rhetoric of envy if shareholders were willing and knowing victims. But in reality they have little control over pay rises, which are usually pushed through at annual general meetings with a single vote on the report and accounts.

Institutional investors, though critical, are slow to rebuke companies where greed is rife. The Government has mistakenly stood aside. The Stock Exchange, through its new Cadbury code of conduct, could force companies into openness and proper, informed debate with shareholders about salaries. Without such checks, both the credibility and efficiency of British management will continue to plummet.