Fat cats have little to fear from Cameron curbs

January 5, 2012

By Edward Hadas
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

All those in favour of “grossly excessive pay rewards”, raise their hands. No takers? All right, how about everyone who approves of “a few at the top” receiving “rewards that seem to have nothing to do with the risks they take or the effort they put in”. Still no one?

That is hardly a surprise. But almost universal condemnation – now backed by these tough words of the UK prime minister and his Treasury chief secretary – does not translate into lower pay for the corporate elite.

Those at the top are certainly not suffering. IDS, an incomes consulting group owned by Thomson Reuters, the parent of Breakingviews, reported that directors of top UK companies received an average 49 percent pay increase last year. That followed a 55 percent rise in the previous year. In stark contrast, the average worker managed a 4.5 percent gain over two years.

Those receiving, and awarding, the high pay are unlikely to plead guilty to social injustice. They will say that they are merely participating in an Anglo-American trend that started in the 1980s. They’re right about the pay acceleration.

Economists Carola Frydman and Raven Saks Malloy calculate that median inflation-adjusted pay for the top three executives in U.S. companies rose only 5 percent between the 1930s and the 1970s, and by 55, 126 and 125 percent in each of the next three decades.

But no one has provided a full explanation for the shift upward, or for bosses’ real-value pay cuts between 1940 and 1949, from 24 to 17 times average earnings. Government policies – war-related curbs in the early 1940s and financial deregulation in the 1980s – probably played a role. Many explanations, however, end up with an unsatisfactory invocation of mysterious social forces.

Politicians might not be able to resist forces powerful enough to persist through financial collapse and recession. Even so, their outrage looks half-hearted. The British government has no concrete plans for legal or policy changes to make the rich truly uncomfortable. To be taken seriously, David Cameron et al need to offer more than rhetorical nudging. Solemn words are unlikely to turn the social tide.

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The problem is that top pay and share performance have diverged. The owners of companies are making a loss while only the top employees are helping themselves to large sums. In a no lose situation for them. It is a kind of theft.
A variation of a very good scheme we had was that as share bonus one would get to buy shares at todays prices three/five years from now (number of shares depending on seniority and performance). The cash bonus would be a percentage 10-30% of salary depending also on seniority and performance. This ensures that the company has to do well in the long term for big bucks to be earned.
Govt should not regulate the amount but set the bonus framework under law in addition to making shareholder vote binding.

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