Pay divide between top executives and public widens

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The gap between top executive pay in the private sector and that of the general public is widening rapidly and is “out of control,” according to a report from the High Pay Commission.

Top pay is spiralling towards relative levels not seen since the Victorian era, the commission, which is funded by the Joseph Rowntree Charitable Trust, said.

Yet there was little evidence that corporate performance had improved as a result, there were some indications that it had got worse, and claims that top executives would be poached in an international market if remuneration committees did not keep ramping up senior pay were not supported by the evidence, it said.

The commission, established by the pressure group Compass and chaired by Deborah Hargreaves, a former business editor of The Guardian and ex-news editor of the Financial Times, said boardroom pay “appears immune from financial constraints” with a continued “arms race” in senior pay.

In 2010, chief executives of FTSE 100 companies were paid on average 145 times the average salary. Back in 1999 the multiple was 69. On current trends it will be 214 by 2020, or around £8m a year.

In the 30 years to 1979, the share of income going to the top 0.1 per cent of earners dropped from 3.5 per cent to 1.3 per cent. Today, the top 0.1 per cent takes home as big a share as it did in the 1940s.

The commission’s current report is an interim one with recommendations coming in the autumn. But Ms Hargreaves repeated the warning made by Richard Lambert, the then director-general of the CBI employers’ body, a year ago that “if leaders of big companies seem to occupy a different galaxy from the rest of the community, they risk being treated as aliens”.

Attempts to link top pay with company performance only seem to have resulted in pushing up remuneration, Ms Hargreaves said, “with little corresponding step-up in business success”. In 1983, 90 per cent of the public thought banks were well run. Today that percentage is 19 per cent.

Over the past decade, chief executive remuneration had quadrupled but share prices had fallen, according to the report. Despite claims of a competitive international labour market at senior levels, only one FTSE chief executive had been poached by a rival in the past five years, and that was by another British company.

External appointment of chief executives has increased. But 59 per cent of current FTSE chief executives have been part of their companies for at least five years, and their turnover rate – 6 per cent in 2009 – is less than half the national average.

One factor in the rise in top pay has been the spectacular decline in trade union membership, the report notes, down from half the working population in 1980s to barely a quarter today. There is evidence unionised companies pay their chief executives less than non-unionised groups.

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