Who in their right mind would defend a group of people who earn hundreds of thousands of pounds a year, 30 or 40 times what the average person earns? Well, someone should- because the fat cats seem unable to defend themselves and with Labour threatening legislation on executive pay we are in danger of damaging our competitiveness. The fat cats issue has something in common with the rumpus over mad cow disease-lax regulation and government bungling leading to hysteria, all based on no discernable evidence.
"Pure greed" was the analysis offered by most newspapers on the 1994 pay increase to Cedric Brown, then head of British Gas. But the editors, whose papers hounded Brown out of a job, are hardly abstemious. Take Paul Dacre of the Daily Mail on ?500,000 a year, or Sir David English, his boss, on ?800,000, or Max Hastings (?533,000) or Charlie Wilson (?693,000)-all took home a lot more than Brown.
So why have the top industrialists been singled out? KPMG, the accountants, recently disclosed that the senior partner, Colin Sharman, earned ?740,000 in 1995. This level of remuneration would rank him 32nd among top executives in the FT-SE 100, whereas KPMG's income would rank the firm only 251st in the Times 1000. Another 18 KPMG partners earned over ?250,000 each -meaning they were also earning more than the highest paid executives at many FT-SE 100 companies. Moreover, KPMG partners are not the highest paid accountants; top lawyers earn more than accountants, and a banking job was recently advertised at ?700,000 a year.
Pay (excluding share options) of the median highest paid executive of companies in the FT-SE 100 increased (after inflation) by 12.1 per cent a year in the last decade. But the ratio of average director's remuneration to average earnings generally in the early 1970s, about 12 or 13 times, was not dissimilar to today's. In the late 1970s, company directors coped less well with inflation than their employees and by the early 1980s directors' earnings were down to seven times the average. But since then they have been clawing back their relativities-to 14 times the average in 1995. So the recent pay increases should be seen as a catch-up.
British executives still earn no more than those abroad. Indeed, the growth in British salaries has been slower than those of our competitors since 1988. In 1995 the salary of the average chief executive in Britain, ?300,000, compared to ?317,800 in Germany, ?346,200 in Japan and ?575,300 in the US. The British do seem to have a high ratio of executive salaries to average earnings (18, compared to 10 in Japan, 11 in Germany and 28 in the US), but this is due to the low level of British wages. To reduce this gap, we must increase productivity, not hold back top salaries which would diminish our competitiveness.
What about the notorious public utilities? Everyone knows their executives have been greedy. Not so. Only one of the utilities in 1994, British Telecom, paid its top executive more than the median company in the FT-SE 100 (Blue Cir-cle, ?523,000); only one (Eastern Group) paid him more than the size of the company would justify; Cedric Brown ranked 52nd in the salary league while British Gas was the tenth largest company. The increase of 188 per cent in the last three years in the salary of the top man at National Power only took him into 68th position in the FT-SE 100, whereas it ranked 28th in terms of size (of total assets). Pay has been increasing particularly rapidly in the utilities because the level of salaries in the old nationalised industries was relatively low.
Other misconceptions surround share options. Heads of utilities figured prominently among the executives to gain from options in 1994-95: Ed Wallis of Powergen made a ?1.2m profit, for example, while Iain Vallance of BT pocketed ?0.6m. But these large sums arise as the result of the extraordinary performance of the shares in the utilities rather than premeditated greed. If the profits from options are annualised they look less outrageous-an increase for Wallis from ?303,000 to ?408,000; Vallance from ?484,000 to ?599,094.
The Greenbury report which looked into this matter contained not a single piece of data on director's remuneration and simply asserted that some water and energy companies paid their managers too much. They do not. Because Richard Greenbury did not know what he was talking about, the report prompted Kenneth Clarke to blunder into changing the tax treatment of share options without realising that this would hit hundreds of thousands of relatively slim cats rather harder than the fat ones.
Another misconception is that executives should be rewarded in line with the performance of their company. They should not. First, the performance of a company, particularly in the long term, can never be accurately measured, least of all by its share price. Second, linking pay and performance might encourage short-termism and discourage long term investment or restructuring-exactly what was being attempted by Cedric Brown. Why should executives engage in expensive and risky capital investment projects when their income could be boosted with a few acquisitions?
This is not an apology for large incomes. Anyone who argues that paying someone a million pounds a year is too much can clearly make a strong case. But singling out the chief executives in charge of our wealth-creating sector is wrong.
