Boss' bonuses boosted by 187% since 2002

A report by the High Pay Commission has shown that FTSE 350 directors' salaries have risen at a much faster rate than their company's values.

by Emma Haslett
Last Updated: 05 Sep 2011
Much wringing of hands this morning, after the High Pay Commission, the group set up by the Government in November to investigate salaries among directors, found that the average bonus for FTSE 350 directors has risen by the not inconsiderable figure of 187% in the last 10 years. Critics’ have, quite rightly, pointed out that while pay has skyrocketed, companies’ performances haven’t risen quite as quickly – in fact, the FTSE 350 has only risen by 21% over the same period. So much for performance-related pay.

According to the report, boss’ salaries have risen by 63% since 2002, while total pay packages for company executives in the FTSE 350 have risen by 700%, and the average annual bonus has almost doubled from 48% of salary in 2002, to 90% now. In fact, in the previous year alone, the average director’s pay package has more than tripled from £1.3m to £4.5m (its biggest leap in nine years).

Now, we can understand why the average British worker might feel a little disgruntled about that: after all, during the same 10-year period, the average salary has risen by a little more than a quarter – nowhere near the figure of their bosses. And the last few years have been particularly challenging, as illustrated by wage inflation for the final three months of 2010, which stood at a far less impressive 2.2% – while inflation was about 4.8%. So in effect, people were actually finding that they could afford to buy less.

The report does rather lend weight to the argument that financial incentives don’t necessarily beget better performances – as indicated by companies’ success rates, and  the fact that despite their directors’ riches, business’ fortunes have been particularly dire lately as markets across the world have yo-yoed. As Deborah Hargreaves, the Commission’s chair, put it: ‘the evidence exposes the myth that big bonuses and high salaries will result in better company performances.’

To be fair to directors, those pay deals are less than straightforward. Most are largely made up of shares (which, as we’ve seen recently, can rapidly lose value), which can’t be cashed in for long periods of time. And since the beginning of the recession, a lot of businesses have made the effort to at least appear to be addressing this very issue, by linking their bonus schemes to company performance. But the report says that’s only clouding matters: ‘all we’ve seen is things getting much more complicated – in many ways masking the real value of what executives get paid,’ said Hargreaves.

The difficulty for companies is that there’s enough public outrage about the issue to make it pretty important. But what’s the solution? Obviously, UK businesses have to compete in a global market – and unless they pay competitive salaries, they won’t attract the best leaders. But at the same time, while people are seeing a collapse in living standards, such high salaries are tough to justify.

The High Pay Commission is due to publish its full findings in November. But businesses would do well to do something about it sooner, rather than later. After all, once the Government wades in, you can be sure that things won’t go quite as planned…

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