Are executives worth their huge pay packets?

Man in suit in silhouette
Image caption Shareholders are angry as it seems the men in suits are walking away with most of the money

A disgruntled shareholder at the Cable and Wireless AGMs earlier this summer was clearly ready to voice her anger.

"All the money and all the profit seem to be going toward the salaries of the board and I didn't necessarily think that they were worth that amount of money," she says.

The woman seemed to be echoing the sentiments of many of her fellow shareholders.

And in recent years, particularly since the start of the banking crisis, her concern has been widely shared across the country too.

But why has pay for people at the top got so high? Do they really earn it? Do we need to pay it?

'Talent myth'

Management writer David Bolchover certainly does not think so. He believes high pay is sustained by an ideology that he calls the "talent myth".

"The 'talent myth' states that there are a small proportion of high flying employees who make a huge impact on their companies success and that those employees are extremely difficult to replace," he says.

But lots of people have the characteristics needed to be successful, Mr Bolchover insists, so why should they be so hard to replace?

The answer, he reasons, is that there is a whole industry consisting of other high-paid people, institutional shareholders, pay consultants, even journalists and academics who have a vested interest in sustaining high pay.

Pay to impress

Many might disagree with parts of Mr Bolchover's analysis, but it seems there is also widespread acceptance of the notion that too much money is being paid out.

Yet it happens, in many different ways.

Kit Bingham, who recruits top people for executive head-hunters Odgers Berndtson, says one of the biggest problems is companies being forced to declare how much they pay their top executives.

"A chief executive can turn to his board and say 'look, I'm far better than Joe Bloggs in my peer group over there, and look he's being paid 25% more than me. Why is this? I demand an increase!'"

Moreover, Mr Bingham reasons, companies need to persuade the City that they are ambitious.

One way of doing that is to try and recruit top people, paying top salaries, even if the person is not actually a top person in reality, he explains.

'Pay bubble'

Jon Terry, head of reward at Pricewaterhouse Coopers, says there are also problems within companies.

Weak or low-quality remuneration committees setting vague or unchallenging bonus targets can easily allow high bonuses to be paid, even when companies have performed poorly.

And company shareholders are not always interested, either.

Many are based overseas and even some of those based in the UK "do not see companies as things that are necessarily generating wealth for the economy, but as things that they just buy and sell and trade", according to Sarah Wilson, head of Manifest, which advises institutional investors on how to vote on such things as executive pay.

In other words, there is a "pay bubble", and the benchmarking, targets and bonuses that have contributed to it in the private sector are now familiar across the public and voluntary sectors.

Large bonuses

Over the last decade or so, the biggest source of the growth of high pay and wider inequality has been bonuses, according to some recent research.

And those who have benefited have been "the people [already] within the top 10%, and then even within that group the top 5% and the top 1%" of the income scale, according to Brian Bell, a Research Fellow at the London School of Economics' Centre for Economic Performance.

Most of them are based in London where they work in the financial sector, have… essentially run away from the rest of the workers."

But bonuses do not even work as intended, according to Professor Dan Ariely, a leading behavioural economist.

His research shows that while people jump higher or perform better on manual tasks if they are offered greater rewards, "on tasks that require concentration, thinking, memory, any kind of cognitive skills… the more money we put in front of people, the worse they do".

Curbing pay

A recipe for direct intervention to curb executive pay may be emerging.

Will Hutton, who has been asked by the government to explore introducing a 20:1 pay multiple in the public sector, says if it works there it could easily be adopted elsewhere too.

"Hopefully this produces a high performance and high morale public sector," he says.

And if that happens, he predicts private sector companies might well respond by trying something similar themselves.

Can Pay, Will Pay, is on Radio 4 at 0900 BST on Thursday 16 September, and on Friday 17 September.

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