Sky-high executive pay is damaging capitalism

Stupidly high executive pay packets jeopardise both the reality and the perception of capitalism, says Merryn Somerset Webb. That’s a very bad thing indeed.

A few weeks ago I interviewed a FTSE 100 CEO. I wasn't, if I'm honest, much taken with him. And when I asked him about his pay, I began to genuinely dislike him.

He had told me at some length about how his company pays all the taxes it should pay. It is important to pay what is due, he said in a saintly kind of a media trained voice. Avoiding tax and then excusing it by saying that "it is within the law" just isn't enough. You can't hide behind committees and legalities.

Hmm.

I asked him what he was paid. The answer was well over £2m. I wondered if he thought that was OK (he isn't, after all, an entrepreneur, just a manager). His reply rather floored me. Lots of other people running companies are paid more than that, he said.

That might be true (the average FTSE 100 CEO makes more like £4.6m a year). But it's not what I asked, I said. Is it too much?

Not really, he said. There are lots of things he would like to have that he can't afford, even on that. Anyway, what he gets paid is nothing to do with him, he says. A committee sets it. Right. How's that for a blind spot (or really lousy media training)?

He isn't alone, of course. Any quick flick through the papers will show you tin ear after tin ear.

This week we had Lord Browne flogging his new book via interviews in the papers. He was scathing about what the Americans call "pay for pulse" getting piles of money just for being there. No mention of the £22m pension pot he accrued at BP on top of his whopping great pay packet. Yes, you read that right: £22m. A sum that gives an income of £1m a year.

Then there is Martin Sorrell and his £70m paycheque as chief executive of WPP. That's justified by the "nuttily high pay is a good thing" lobbyists on the basis that he set the thing up in the first place. But I'm not sure that washes any more. It now is set up and listed on a stockmarket, and he is managing it. The benefits of ownership should now accrue to the owners via their shareholdings. That's the point of capitalism.

This isn't just a UK problem (look to the US and you can find a long, long list of CEOs cleverly extracting $20m a year from the companies they have been appointed to run). But it is an increasingly serious problem for two reasons.

One, it is entirely unnecessary, and therefore wrong (it represents a pointless transfer of wealth from shareholders to managers).

And two, because it looks bad. These bosses, their remuneration committees and the world's equally insanely overpaid top fund managers are pretty much the only people who still think this kind of pay is OK. Even headhunters think its nuts: a report from the London School of Economics out earlier this month showed most of them agreeing that top salaries are now "absurdly high". The "wage drift", said one, has been "inexcusable, incomprehensible and it is very serious for the social fabric of the country".

And here we come to the key point: the social fabric of the country.

I had a mini Twitter row with Henry Pryor (generally a great friend of the magazine!) yesterday. He took issue with my irritation with BrightHouse (you can read my last article on them here). I think they exploit the poor with their stupidly high interest rates and rubbish guarantees on workaday white goods. He thinks whatever they do is fine as long as it is legal that's just markets for you. You can read the row here or on our respective accounts, should you care (@merrynsw and @henrypryor).

But my final point on the matter was this: capitalism is amazing. But it only works as long as it keeps making us all better off and crucially is seen to be doing so. Stupidly high executivepay packets jeopardise both the reality and the perception of capitalism. That's a very bad thing indeed.

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