CEO pay a "perversion of market principles"

2006

The massive rewards paid to many chief executives are a "perversion of market principles" and cannot be justified by arguing that the top job comes with high risks, a new British report has claimed.

Chief executives may like to think of themselves as risk- takers, but the role is relatively low risk in comparison to many others and certainly cannot justify growing chief executive pay packets, the report by the Work Foundation argues.

Indeed according to its author, Nick Isles, with many FTSE-100 CEOs little more at risk of being fired than the average worker, the growing gap between CEO pay and average earnings "corrodes the basic concept of fair reward that underpins a thriving society".

In addition, he points out, CEOs will tend to live longer and are cushioned from falls of grace by large pension pots and sizeable pay-offs.

"People instinctively understand the difference between risk-taking entrepreneurship and able stewardship of an organisation. What the paper shows is that the levels of risk borne by CEOs are actually quite modest," Isles said.

The foundation's research analysed data from a 12-month period and compared the labour market outcomes of the CEOs of the FTSE 100 in that period with whole-economy labour market data.

For the year to summer 2006, average CEO remuneration packages increased more than a quarter – 28 per cent – against inflation of 2.8 per cent and average wage increases across the whole economy of 4 per cent.

Average FTSE chief executive remuneration topped £2.4 million up from £2.1 million the year before, while performance-related pay made up more than half of this total, up from 46 per cent in 2003..

Between 31 July 2005 and 31 July 2006 FTSE-100 CEO turnover stood at 14 per cent, against a national average of 18.3 per cent and in the private sector 22.9 per cent (the public sector was 13.3 per cent).

But of the 14 FTSE-100 CEOs who left their posts during period only one was made redundant- and he left with a pay-off of £5 million.

In contrast, the report found, over the course of the same time period, national redundancy rates for all groups of workers averaged out at around 0.58 per cent and for men the rate was near 0.8 per cent.

A man on average earnings of £25,800 per annum with average tenure of 7.5 years would receive around £3,700.

"Reward should go to the talented, the able, the entrepreneurial and the wise," Isles said. "But let us not base arguments about reward on myths about risks that are not actually present.

"A winner-take-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," he added.

"Growing pay inequality corrodes the basic concept of fair reward that underpins a thriving society – and may also damage the performance and long-term success of organisations as staff become cynical and disillusioned."

In addition to progressive taxation to put a brake on excessive pay, the paper called for a High Pay Commission to be established – on the model of the Low Pay Commission.

This would set reliable benchmarks and make public recommendations to company boards. Representation on those boards should include workers and other stakeholders, said the foundation.