Are the fat cats getting obese?

6 November 2000 - The rules just aren't the same in that fat cat paradise in the boardroom.

Inflation-linked pay increases (plus a little bit - maybe) might be the norm for 'ordinary' employees, and the government claims that they cannot afford to link state pensions to average workers' pay. Contrast this with rewards for the hardworking directors of the largest companies in the UK.

The latest survey from the New Bridge Street remuneration consultancy shows that the chief executives of the UK's top 100 quoted companies rocketed by 20.4% in the last year. Pensioners and students please note that these guys ( not many women around at that level) have to struggle to survive on an average of just £717,000 - just over a million US dollars. In fact the rise in base salary (13.9%) was a little more modest, giving them an average of £486,000. The rest was made up of bonuses but does NOT include pensions and share option schemes.

Looking at the FT-250 companies - bringing in some smaller quoted businesses - the total cash earnings of chief execs grew by a whopping 23.3% (third quarter comparisons between 1999 and 2000). Their average cash earnings reached £488,000.

The stock phrase in company reports is that 'our people are our greatest asset'. Clearly there are people and people. If commitment and trust are major goals of people management why should those at the top be rewarded by pay systems or performance criteria that are any different from those applied to other employees?

One argument is that top executives need to be motivated by pay packages that will get the best from them. But doesn't this argument apply to everyone else? Another view is that they are so special that they need 'golden handcuffs' to stay with their existing companies - otherwise they would be snapped up by 'world-class' businesses.

Can we really argue that boardroom inhabitants are so special? Bizarrely, the businesses that rewarded their chief execs most generously were in the general retailing sector where many famous name companies have done badly. Their total cash earnings averaged £616,000 - a rise of 37.3%.

In fact, the mechanism for rewarding top managers has little to do with performance. Pay is typically benchmarked against the highest remuneration or thereabouts in an industry sector (certainly never less than the average). When one person's pay goes up it feeds into the average - ultimately boosting everyone else's rewards. And round the circle goes, spiralling ever upwards. The only stakeholders with the power to do anything about it are the shareholders. Ironically these are often pension funds. And they are notorious for their 'hands-off' approach.

In HR terms, this is bad-value resourcing.

Related article: Lack of transparency in boardroom pay