Pay at the top has become a self-enriching racket

The relationship between bonus increases and profit growth is virtually non-existent.

The relationship between bonus increases and profit growth is virtually non-existent

There are a number of difficult questions to grapple with when trying to establish whether or not the increasingly extraordinary sums of money paid to a super-rich elite in a handful of leading professions are ‘fair’.

Can one or two individuals really be responsible for the success of organisations employing thousands of people on multiple continents? Are the markets for executives, lawyers, bankers and consultants completely transparent, open and functional?

Is there a limit beyond which we might consider the gap between rich and poor to be intolerable, grotesque or socially and economically destructive?

But each of these questions rests upon the assumption that those at the top are paid, at least ostensibly, in proportion to their success.

It may be that executives claim sole credit for the achievements of an entire company. Perhaps their God-like genius is over-valued by uncritical remuneration committees and asset managers who have a vested interest in keeping top pay racing upwards.There is considerable support for the idea that a more unequal society is divided, weak and unfair. But ultimately, the assumption is that pay is going up because performance is too.

In fact, this is far from the case. New research carried out for the High Pay Centre by Income Data Services examined median pay increases for FTSE 350 directors compared to the increase in company performance, as measured by a series of metrics used by the corporations themselves to calculate executive bonuses and incentive payments. The results are summarised in the chart below.

Median FTSE 350 directors pay increase (orange) compared to selected corporate performance indicators (blue), 2000-2013

High pay

Most strikingly, total FTSE 350 directors pay increased more than twice as fast as the pre-tax profit and four times as fast as the market value of FTSE 350 companies.

Amazingly, the biggest discrepancy occurred between the biggest, supposed ‘performance-related’ components of pay – annual bonuses and gains from so-called ‘long-term incentive plans’ – and actual performance.

Bonuses are usually measured against some form of profitability, while LTIPs are linked to three year changes in ‘earnings per share’ (related to company income) and increases in ‘Total Shareholder Return’ (calculated using share price changes and dividend payments). In each case, the increase in payment was totally disproportionate to the relevant metric. The relationship between bonus increases and profit growth was virtually non-existent.

Relationship between changes in pre-tax profit and changes in annual bonus payments in FTSE 350 companies 2000 to 2013

High pay 2

The obvious conclusion is that pay at the top has become a self-enriching racket, with the remuneration committees that set pay happy for executives to enjoy a windfall when the economic going is good, then reducing targets so they can cash in during leaner times as well. Company workers and shareholders are being ripped off as top bosses are lavishly rewarded while failing to grow the wages or savings of ordinary people.

The problem is that shareholders have thus far proved difficult to mobilise against top pay – partly because the holdings and voting rights on pay are controlled by wealthy fund managers – and the workforce have no say in the process.

Putting workers on remuneration committees might be one place that government could start reforming the culture of unjust rewards. Mandatory publication of company pay ratios, measures to strengthen trade unions and coercion or incentives designed to increase the prevalence of workforce-wide profit sharing would be good ways to follow this up.

Luke Hildyard works for the High Pay Centre and is a contributing editor to Left Foot Forward

20 Responses to “Pay at the top has become a self-enriching racket”

  1. Peem Birrell

    On a smaller scale (6-figure salaries rather than 7 figure) the same thing happens in the public sector. Not really surprising when people determine their own pay and bonuses (via rubberstamping remuneration committees).

  2. Dave Roberts

    With reference to the title as Michael Caine would say, “talk about stating the bleeding obvious”.

  3. David Davies

    There is a cosy little club of tax-dodging criminals who form `remuneration committees’ on a back-scratching basis. The same parasites believe that t give a living wage to tax-paying plebs would rend asunder the space-time continuum.

  4. robertcp

    This suggests that taxes on the rich could be increased without affecting the economy.

  5. blarg1987

    As the article states, remuneration committees are going to look after their own, as soon as they face competition like the very day joe has then their salaries will fall.

    We need to play them at their own game, for example if we have to go to eastern Europe to recruit bus drivers why can;t we do it for CEO’s? there must be numerous successful companies who will do double the work for half the pay.

    A step in the right direction would be to give individuals more power, this could be done by all investment funds doing a simple questionnaire asking what they think CEO pay should be from highest to lowest earner 10 x, 20 x etc. From this our representatives should then vote down pay if it exceeds the limit that the majority of what the people want.

    Another thing should be to remove the power of None executive boards and CEO’s being able to set pay and give it directly to staff and shareholders, in many companies cases such as Tesco’s it will be a large chunk of the staff.

  6. Guest

    And yet, as ever, you don’t want it talked about because of your support for it.

  7. Leon Wolfeson

    Completely incorrect. Pay multiples in the public sector have remained remarkably constant.

  8. Leon Wolfeson

    “Mandatory publication of company pay ratios”

    Sure, as long as one of the bits of data is the pay ratio, including agency/temp/oursourced staff.
    Lots of places outsource the cleaners to the minimum bid, and that should be noted.

  9. Peem Birrell

    Not where I was they didn’t.

  10. Leon Wolfeson

    That’s nice, but I’m talking about the UK.

  11. Peem Birrell

    In his Final Report, Will Hutton made recommendations for a new settlement for public sector leadership. Under this deal, senior public servants’ pay would be directly linked to their performance and would be explained transparently to the public. In return, public service leaders would be entitled to expect improved public appreciation of the responsibilities of senior public service roles, and the ethos of public service that motivates them.

    Since its publication there has been limited implementation of its recommendations in the Civil Service and its recommendations remain dormant in the wider public sector and in higher education.

  12. Leon Wolfeson

    Ah yes, based on how well they suck up.
    And in return, you’ll still hate them.

  13. GhostofJimMorrison

    Indeed. Hasn’t this topic been covered about a million times already. Personally, I want the author’s job at the High Pay Centre, which I’d never heard of until just now. I’m guessing the average working day goes something like….

    “Yep, he’s paid too much.”
    “Well they definitely earn too much!”

    As Yozza Hughes liked to say: “Giz’ a job! I could do that”!

  14. GhostofJimMorrison

    You really hate people who are more intelligent than you, don’t you Wolfman! It’s rather hilarious and pathetic to watch.

  15. Selohesra

    He must hate a lot of people then!

  16. RoyB

    One of the loopiest, least numerate, aspects of Remuneration Committees (and, importantly, the consultants who advise them and provide useful back-covering) is the consideration given to the “going rate” (ie the current pay levels of Directors in comparable companies). The objective is to beat the going rate, on grounds of status and prestige, leading to a constant ratchet upwards in this impossible attempt to beat the mean.

  17. Matthew Blott

    Good point.

  18. Guest

    Talking to yourself again?

  19. Guest

    Keep blaming me for your looking into your mirror, Hateman / Dave / LordBlagger.

  20. Guest

    Of course you want to take other people’s jobs, as you would destroy useful work to spew propaganda.

    It’s what you do.

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