UK: HELLER ON MANAGEMENT - TOP PAY SCALES HIT THE WRONG NOTE. - Comparability is the argument commonly used to justify steep rises in top executives' pay. But would any company cut its chief executive's salary because others are paying less? asks Robert

Last Updated: 31 Aug 2010

Comparability is the argument commonly used to justify steep rises in top executives' pay. But would any company cut its chief executive's salary because others are paying less? asks Robert Heller.

The furore over Cedric Brown's pay as chief executive of British Gas has many layers. You could object to the absolute size of the salary (£475,000); the steepness of the increase (76%); the timing, coinciding with lay-offs and higher prices; or any combination of the three. But none of these raises fundamental issues.

The salary, while good, is not enormous by current, recently much elevated British standards, let alone international ones. The angle of increase is therefore irrelevant. If a man is seriously underpaid, any correction is bound to be of serious proportions. As for the timing, should executive pay really be determined by whether prices are rising or workers being dismissed? That's a novel and difficult argument.

The fundamental issue concerns the method by which the reward of high and mighty executives is determined. The position of Richard Giordano, the British Gas chairman, has always been clear since the moment that BOC brought him across the Atlantic. His huge salary raised not only eyebrows, but the whole level of expectations among other corporate bosses. The ratchet phenomenon applied as boardrooms adjusted to the new target, and sought to seek higher levels still.

Hence British Gas can argue with a perfectly straight face that the boosts for Brown & Co are merely designed to place its top executives on a par with BP, BT, Barclays, Glaxo and Cadbury Schweppes. Should any of these be overtaken by other runners, they can equally argue that their next whopping rises simply place them on the same level as - well, why not British Gas? Comparability is a wonderful euphemism for salary increases. To prove the point, which company would cut its chief executive's pay because others are paying less?

Of course, underpayment and overpayment co-exist. Executive pay has no discernible pattern, no justice (rough or otherwise), and no logic. Certain factors can be isolated. Supply and demand have an influence, not overall, but in isolated instances.

But that can only marginally affect the overall level of executive pricing.

According to Monks Partnership, annual increases in top executives' pay have been averaging the lowest for five years: 5.8%. On the other hand, Monks no longer lists those whose total remuneration exceeds £500,000. Their numbers have swollen to so great a figure (over 70), that Monks now lists those who top £1 million (which excludes share options). They number 16, of whom seven are in the City (half, if you count Euromoney). The point is incontestable: in general, top executive pay moves steadily upwards - but those who can get their hands really deep into the pot, do so.

Their ability has some crude relationship to the size of organisation. In any hierarchy, there must be enough room to provide stepped increases all the way up the pyramid, and that alone may require a very large differential between top and bottom. The differential, though, has no ceiling. Notoriously, the gap between average chief executive pay in the US and that of the average factory worker has been widening to a mind-boggling degree. It now stands at 149 times, when a fifth of that multiple might be considered reasonable.

Any reference to American pay levels (increasingly relevant now that business is going global) is bound to provide extra thrust to upward pressures in Britain. The argument is then that you need world-class salaries to get world-class performance. That doesn't get much support from the latest IBM-London Business School report on UK manufacturing. It found only 2.3% of companies to be world-class, and 40.3% to be contenders. That's no better than a year ago, which ostensibly doesn't speak well for the boom in top take-home takes.

But whoever said that high pay and high performance go together?

The only people who are in a position to correct such anomalies, though, belong to the same club as the beneficiaries - and there's the real rub.

This year, true, Salomon Brothers is undergoing correction. Managing directors are guaranteed only 35% of 1994 compensation: all bonuses depend on beating a 7% return on equity. Very few other boards, however, will embrace such heresy.

Every time I write on this scandal, a New Yorker cartoon springs to mind. A chairman is congratulating the board on voting 'these large increases, and thus ensuring for the corporation our continuing loyal services'. Why, that sounds just like Dick Giordano.

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