The take-home pay of the executive directors of FTSE 100 companies rocketed by 49 per cent last year, bringing the value of salary, bonuses and other incentives to an average of £2.7 million. This comes at a time when pay for workers in the private and public sectors is being squeezed, with either low or no increases in pay awarded at all.
The main rise came through bonuses – up by 23 per cent to an average of £906,000; the actual average salary went up by a mere 3.2 per cent. However, chief executives received a little less than their colleagues. Typically, their packages rose by “just” 43 per cent. These figures will fuel the debate around excessive boardroom pay.
The increase in executive pay was highlighted in a report by Incomes Data Services (IDS). The report’s editor, Steve Tatton, pointed out that “at a time when employees are experiencing real wage cuts and risk losing their livelihoods, without further explanation it may be difficult for FTSE 100 companies to justify the significant increase in earnings awarded to their directors.”
The news prompted the prime minister, David Cameron, to describe the increase as an “issue of concern”. Speaking at the Commonwealth summit in Australia, Mr Cameron told reporters that “everyone, whether they are in public life, whether they are in private enterprise, they’ve got to be able to justify the decisions they make about pay.” He called for pay and bonuses to be published, including the difference between the lowest and highest paid in a company.
“The most senior executives are in danger of becoming (or have already become) totally removed from reality,” said Alan Crozier, author of The Engagement Manifesto. “People aren’t stupid; in this scenario, they feel they are being used and abused. They become cynical, distrusting, and morale drops at a time when it needs to remain high.
“At the first opportunity, the most talented employees seek pastures new. According to the Chartered Institute of Personnel and Development, 22 per cent are currently looking for a new employer. That represents a significant potential attrition cost. Nearly half distrust their directors. When trust goes, so does engagement, a significant driver of organisational performance.”
Mr Crozier said that at one end of the spectrum those senior executives are in the personal wealth-creation business, while at the other end they are destroying shareholder value. “The CEO and executive directors make promises to shareholders and customers that rely for their fulfilment on employees. The executive team therefore have to be totally invested in engaging their employees in that pursuit.”
Last month, business secretary Vince Cable launched a consultation on the future of narrative reporting, including a discussion paper on executive remuneration. At the time, he said there was a “general disconnect between pay and long-term performance [that] suggests that there is something dysfunctional about the market in executive pay or a failure in corporate governance arrangements.”
The news caused outrage amongst union leaders. Unite said executive pay was “obscene” and called for shareholders to be given more power to hold directors accountable. Unite general secretary, Len McCluskey, said that the government should consider giving shareholders greater legal powers to question and curb these excessive remuneration packages.
“Institutional shareholders,” he said, “need to exercise much greater scrutiny and control of directors’ pay and bonuses. It’s obscene and it shows that the City has learnt nothing during the financial troubles of the last four years.”
Labour leader Ed Miliband said that people were “not against those at the top getting higher rewards if those rewards are earned, if more wealth is created, if more jobs are created. But when people are struggling, when the middle is being squeezed, when people are seeing their living standards fall, it is not fair for those at the top to get runaway rewards not related to the wealth they have created.”
But Sir Martin Sorrell, chief executive of advertising firm WPP, launched a strong defence of executives’ pay on Today on BBC Radio 4. “Look at what chief executives of media companies are paid in other parts of the world,” he said. “We are a worldwide company; we are the leading company in our industry. The comparison, whether you like it or not, is with other companies in the world.”