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Boardroom Pay and the Risk Myth

January 24 2007 - Recent research for The Work Foundation has found that FTSE 100 CEOs have little more risk of being fired or made redundant than the average employee. However, they tend to live longer and have the advantage of large pensions and sizeable pay offs.

Nick Isles, author of the study said:

"People instinctively understand the difference between risk-taking entrepreneurship and able stewardship of an organization. What the paper shows is that the levels of risk borne by CEOs are actually quite modest."

The Risk Myth: CEOs and labour market risk compares labour market outcomes of FTSE 100 CEOs with data for the whole economy for the 12 months to summer 2006. Average CEO remuneration packages increased by 28 per cent compared to average wage increases of 4 per cent and inflation of 2.8 per cent. Average FTSE CEO remuneration topped £2.4 million compared to £2.1 million the previous year. Performance related pay accounted for over half the total (55 per cent), up from 46 per cent in 2003.

The study found that in the period 31 July 2005 to 31 July 2006 there was 14 per cent turnover among FTSE 100 CEOs compared to a national average of 18.3 per cent. Turnover was significantly greater in the private sector (22.9 per cent) compared to the public sector (13.3 per cent).

The only FTSE 100 CEO made redundant during the study period left with a pay off of £5 million. National redundancy rates for all workers averaged approximately 0.58 per cent (near 0.8 per cent for men). A man earning £25 800 per annum with average tenure of 7.5 years would receive about £3700. The study points out that the redundant FTSE 100 CEO received more than 1350 times that sum.

The study proposes progressive taxation to curb excessive pay and establishment of a High Pay Commission. Modelled on the Low Pay Commission this would set benchmarks and make public recommendations to company boards that should include workers and other stakeholders.

Nick Isles commented:

"Reward should go to the talented, the able, the entrepreneurial and the wise. But let us not base arguments about reward on myths about risks that are not actually present. A winner-take-all market has developed among top CEOs and nothing seems able to stop it. If we pay our top public servant - the Prime Minister - £186 000 a year why do FTSE 100 CEOs deserve more than 15 times that for stewarding their companies?

"The basis for paying such large and inflationary pay increases to CEOs is a perversion of market principles. Growing pay inequality corrodes the basic concept of fair reward that underpins a thriving society - and may also damage the performance and long-term success of organizations as staff become cynical and disillusioned."

Related article: Are the fat cats getting obese?

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