The FTSE100 index stands precisely where it did in the first week of December 1999. Whichever way you look at it, shareholders — including pension funds — have had a rotten run on the economic rollercoaster of the past 15 years. So it’s reasonable to keep asking whether the rise in executive pay over that same period is justified: a report from the High Pay Centre says remuneration of the average FTSE100 chief executive is now at a multiple of 143 times that of the average worker in the same companies. In 1998 that multiple was 47, indicating a tripling of top pay relative to workforce earnings while shareholder returns have stayed flat.
Of course this argument is not that simple. There was undoubtedly a time, before the Thatcher revolution, when British company chiefs were miserably under-rewarded; what has happened since is a long pendulum swing chasing US-led norms applicable to ‘global’ companies. The make-up of the FTSE100 has also changed to include more firms that are foreign in all but their London listings and corporate offices; some are mining groups whose workers in Africa and elsewhere are paid very little, distorting the multiple. And the High Pay Centre, though it calls itself ‘an independent non-party think tank’, is in fact the successor of the ‘High Pay Commission’ launched by the Labour-aligned Compass group; it starts from the position that ‘growing differences in pay between high and low earners are neither fair nor proportionate’ and presents its data accordingly.
But left-wingery aside, the ballooning of executive pay is a startling shift in the balance of rewards between providers of capital and hired managers. No politician ever promoted it as a policy objective; shareholders let it happen by hardly ever voting against it. It is easy to justify only in the very rare case of a veteran business-builder like Sir Martin Sorrell of the advertising group WPP, who clocked up a spectacular personal multiple of 780 last year. Heightened awareness of the issue was indicated when the new TSB Bank (carved out of Lloyds) declared a maximum multiple of 65 for the pay of chief executive Paul Pester; this plus a general promise to cap bonuses contributed to positive sentiment for TSB’s flotation in June. The High Pay Centre argues for ‘a democratically enacted maximum pay ratio of (for example) 75:1’ — knowing well that not even Ed Miliband on a bacon-sandwich day would embrace such a provocatively anti-capitalist idea.
But it cannot be a good thing that the multiple should go on growing, unrelated to relative performance, simply because institutional shareholders can’t be bothered to rock the executive boat more often. Let’s have a proper debate about it.