‘The boom in top people’s pay is gathering momentum,’ I wrote before some of you were born — those of you who are still at school, that is. I went on to quote a leading industrialist of the day: ‘Shareholders won’t be able to stop it. Moderation will have to come through pressure of public opinion.’ Statistics from the same source two decades apart suggest public opinion has done a pretty feeble job.
In a piece headed ‘Snouts in the Trough’ (1 May 1993), I quoted an Income Data Services (IDS) survey of FTSE 100 companies whose chief executives had received average annual pay increases in the depths of the 1991-92 recession of 15 per cent, to £463,220. The survey noted that, as the economy deteriorated between 1989 and 1992, the divergence between chiefs’ and manual workers’ pay became steeper, and that in companies whose earnings per share had fallen, nine out of ten still gave bosses a fat rise.
Adjusted for inflation, £463,220 in 1992 is worth £780,000 today; adding a performance bonus to reflect the fact that the FTSE narrowly beat inflation might take the figure to £900,000. But last week, a new IDS survey showed chief executives collecting average increases for last year (in which their staff got 2-3 per cent rises at best) of 43 per cent, to £3.9 million. So in all the years I have been writing about the socially divisive nature of this trend and the impossibility of justifying it in performance terms, the fat cats have multiplied their take more than fourfold.
Some pundits point out that the average is distorted by huge awards to heads of global businesses that are genuinely booming, such as £18.4 million for Mick Davis of the mining group Xstrata. No doubt the boardroom bunce at Glencore, the giant commodity trader which listed this year and shot straight into the FTSE, will affect next year’s average. And Sir Martin Sorrell of WPP has popped up to insist that companies like his, competing around the world and making much of its profit abroad, must always pay the going rate for international talent. But the median rise for all executive directors (excluding those who were paid in foreign currencies, and including many whose role is not ‘global’ in any sense) was still 16 per cent, taking them comfortably through the £2 million barrier despite the poor returns many have generated for their shareholders.
However you look at it, public-company bosses have achieved a long-term quantum pay leap that makes the rest of us, attached though we may be to free-market principles, feel a bit queasy. And ‘pressure of public opinion’ has made no difference at all.
So what would make a difference — or should we just accept that, in this and other respects (see my next item), capitalism creates super-rich elites who will always be regarded as ‘undeserving’ by the rest of society? David Cameron’s instant response to the IDS survey was to call for more ‘transparency and accountability’. But oddly enough, I suspect the executive pay escalator would slow down if there was a lot less transparency — accompanied by a lot less hiring and firing. A potent factor in British corporate life over the past 25 years has been the conventional wisdom (imported from the US) that internal appointments are always second best. Combined with stockmarket pressure for short-term results, that has led to far too many unsatisfactory external hirings, often of Americans and Europeans who were supposed to bring glamour but more often brought disruptive, quick-change strategies that failed to deliver shareholder value. Hence the average tenure for chief executives (now about 4.5 years) has been reducing as fast as their average pay has been rising.
The beneficiaries have been the headhunters, who naturally argue for paying top dollar — because, Mr Chairman, you wouldn’t want globally ambitious Northern Widgets to fall below the median in the ‘directors’ remuneration’ tables; investors might see that as a sell signal. If it were less easy to identify how much individual bosses are paid, and if boards reverted to the practice of filling senior posts from outside only as a last resort — favouring loyal, proven insiders who don’t need to be paid like rock stars — then the trajectory of top pay would curve back towards that of private-sector earnings as a whole. And that would be a thoroughly good thing.
• The Roman way
If you are reading this in a tent outside St Paul’s, you’re probably not a big fan of trickledown economics. Wherever you’re reading it, you may not be a big fan of obscenely rich Russian oligarchs. But wine merchants, travel agents and exotic masseuses close to the Inns of Court must surely be celebrating the fact that Boris Berezovsky and Roman Abramovich are pouring tens of millions into the pockets of London lawyers, as Boris seeks to prove that Roman owes him several billions in the matter of Sibneft, an oil venture in which they may or may not have been partners before Boris fell out with the Kremlin and opted for asylum in Surrey. Readers who picture Spectator contributors typing in mittens in frozen garrets will be pleased to know that our book reviewer Jonathan Sumption (QC, shortly to become a Supreme Court judge) is reportedly clocking up a seven-digit fee for representing Abramovich.
Whatever the later relationship between the protagonists, it was Berezovsky who was the first of the two to make his fortune — in a deal involving 35,000 cut-price Lada cars — while Abramovich was just one of many young men trying to turn a buck in the post-Soviet marketplace. Now, however, Berezovsky’s wealth is said to have ‘dwindled’ to £500 million, while Abramovich’s has fructified to £10 billion. How did that happen? One difference — according to Abramovich’s biographers, Dominic Midgley and Chris Hutchins, quoting an unnamed Kremlin insider — is that ‘Berezovsky was very rude. He would keep people waiting outside his office for hours.’ Ever-smiling, quietly patient Abramovich, by contrast, was acknowledged even by Berezovsky himself to be highly skilled in ‘person-to-person relations’. Good to know that even on the wildest frontier of modern capitalism, it still pays to be polite.