Sky-high executive pay is damaging capitalism

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.


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 executive pay packets jeopardise both the reality and the perception of capitalism. That’s a very bad thing indeed.


  • DiggerUK

    Without a condemnation of the legislative work of both Houses of Parliament, what is the purpose of telling us what we already know?
    It’s the same with the bleating that surrounds companies avoiding tax.
    It is all legal, and in case you have forgotten your lessons from uni, let me remind you that capitalism is bound together by a legal framework of laws…_

    • Kevin Hoque

      Merryn is keeping these issues (problems in our UK implementation of capitalism) in the news. She is right to highlight these concerns. It is up to us to ensure that we change the system by communicating our dissatisfaction to our elected representatives and via the ballot box.

      We can have a further discussion, regarding the merits of our democracy and our ability to affect change. But this doesn’t detract from, what I imagine was, the original purpose of Merryn’s article, which is to keep these issues at the front of our minds. It seems to be working 🙂

  • IWAE

    Merryn, your observations on CEO pay are right on. Their high level enters a climate of entitlement – a l’Orieal ; because I’m worth it. But it is a major fallacy. Major FTSE 100 companies are complex beast to run and rely on the professionalism of many people at all levels of the hierarchy in order to function. In my company a few years ago we lost at one point 2 Board level people and the CFO at the same time. The company’s intrinsic value did not alter nor did its ability to trade profitably.The share price actually when up. Eventually.
    But what to do about it? How about trying the linkage of top executives may to a ratio of middle management’s. This has been suggested in the past and voted down in Switzerland. if the message is not received then a really punitive personal income tax rate of more than 100% and no offset permitted against corporate results for companies paying those kind of salaries?

  • Jab

    There is no mechanism for small shareholders to challenge these super salaries which are often not even linked to performence.It very damaging to have such huge differences in any society and will result in destabilising society which is good for psycho politicians .That is probably what will happen now.

  • David Webb

    Merryn, this was a great article. But given that shareholders won’t vote against sky-high pay, I don’t see a resolution. What is more important than high pay for the CEOs is pay for non-executive directors. I invested in some AIMs shares where the chairman and other party-time NEDs got large share options, despite best-practice guidelines (not laws) by the AIM regulators stating that NEDs should not be getting any share options at all.

    Because the NEDs are often on the remuneration committee, if the NEDs all violate the best-practice guidelines by troughing (in my book = criminal fraud, a shakedown of the companies), then they will always vote to give the executive directors absurd pay packets.

    Non-executives should never get any share options – they are not in an executive role and there is no performance to incentivise – and this should be enshrined in law and enforced in each case of infraction. Pay for NEDs should also be capped by law, in order to take away their incentive to vote to shake down the company when decisions on remuneration committees are made.

    But if after all that is done, they still vote for large pay packets, it is ultimately a question for shareholders to decide.

    Another thing: I have seen one AGM where nearly everyone present voted against a Board pay rise. But those present accounted for 2% of the shares in the company. The chairman then cast the 98% non-present and therefore non-voting shares against the motion — so the pay rises went ahead. Surely those who can’t bothered to attend AGMs should not see their votes wielded by the chairman: those who do attend should do so in the knowledge that the views of those who attend (or who have specifically instructed brokers to cast proxy votes on their behalf) will carry such motions.

    • P Kralj

      Shareholders will vote against such pay if they are enfranchised. Most shareholders hold their investments through fund managers and it is the fund managers who vote. The beneficial owners of the shares are not permitted to vote. This is just the same system that the trade unions of old used before Thatcher. It is about time we stopped these commissars voting with our money. If only those with a beneficial interest in the shares were allowed to vote these vast salaries which are unearned and unjustified and are only permitted because of the power in the hands of those who earn them, would not exist.
      There is a chapter in my book “Wealth Creation or Redistribution” that explains the deficit in shareholder enfranchisement.

      • 4caster

        I thoroughly agree, and for years I have been advocating more power for the beneficial owners of companies. Most small investors hold their shares in nominee accounts, including ISAs, SIPPs, OEICs, unit and investment trusts, whose managers wield the votes. But those people will not vote against outsized executive remuneration because they are in the same jobs market. They are feeding from the same pig trough, or riding on the same gravy train.
        But no government will do anything about it, because reform of corporate governance does not make a good election platform!

        • P Kralj

          I guess you mean that corporate governance is meaningless to most voters. If so I agree. However it all depends on how this matter is put to the public. If it is put to them that a political party will ensure that excessive pay is approved and acceptable to those who pay for it – namely all of us – it might get traction.
          Sadly none of the protagonists in government have even thought about this issue. I have addressed the matter to those who could have done something about it only to be met with stares of incredulity. They simply do not understand the point and since they did not think about it they conclude that it must be rubbish.

  • Pro-EU

    Shareholders need to have binding voting powers on executive pay. Shareholders should have to approve executive pay every year.

  • Siraj Ali

    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.

  • P Kralj

    Firstly what we have now in the West is not Capitalism. Capitalism is the system that rewards labour – which includes white collar labour such as CEOs (Merryn is right CEOs are just part of the labour force, they are not capitalists and certainly not entrepreneurs) – their market rate and retains any residual profits for the investors (savers including those who invest through their pension funds). The system we have now is that investors / savers get the minimum that the managers (labour) will allow them. Those same managers pay themselves the maximum they can get away with. In short they pay themselves on the basis not of market forces but power – just like the old Commisars in the Soviet Union did.
    Secondly as regards the tax schemes you hear about being lawful they are probably not. Tax is one of those areas of law where you can get away with a lot of unlawfulness – just like driving above the speed limit and getting away with it. No tax scheme is lawful until it is approved by the courts. Usually when HMRC challenge a tax scheme it is found to be unlawful. In short those who claim that they pay the right amount of tax and their arrangements are lawful are just saying what they hope rather than what is true.
    I would recommend my book “Wealth Creation or Redistribution” which covers these matters and many others and which explains how wealth redistribution is taking place without the approval of parliament – and therefore probably unlawfully, and how innocent parties are likely to have to pay the price.

  • Langford Thomas

    Well done Meryyn: You correctly identify a major threat to the capitalist system that is systemic and clearly visible – the unfair distribution of wealth. Indeed CEO are not entrepreneurs. The members of a capitalist system can have little argument with entrepreneurs who risk their own money to gain financial success. However, CEO are amassing immense wealth through wages, bonuses and share options (some through share buybacks to trigger performance targets). Their remuneration packages are out of kilter with average working wages. In fact their pension deals are far superior to most workers wages.
    There is a knock on effect in the public sector too. Consider the times that local government say they need to compete with the private sector to attract executives of the right calibre. Their inflated wages tend eventually to lift those of the next layer of management and so on and they then have a knock on in to pensions (and rising council taxes). Clearly no man is an island – for local government we can read the Police Force, Fire Brigade, NHS etc.
    All of this leads to discontent within societies- with some justification when those lower in the pecking order see the same people getting rewarded through pay, bonuses, pensions and Tory budgets. In a re-hash of your words Meryyn – greed and a culture of entitlement at CEO level is a perceived reality that is jeopardising capitalism.

  • John Osborne

    Everyone agrees with Merryn (except the CEOs) but what can be done about it?
    Unless Parliament changes company law and the tax system to prevent these corrupt practices then shareholders are powerless. It is disappointing that our politicians cant see the problem.
    Am furious myself that, in effect, as a shareholder I am paying for the corrupt gravy train that these greedy people are awarding themselves through their incestuous “remuneration committees”.
    A further point on this is UK plc’s continual productive decline in many areas can be linked to the divisions resentment and attitudes involved.
    With all due respect to Merryn, the problem also extends to most
    investment trusts where the NEDs are paid on average £25-30K per annum
    for only attending 1 or 2 meetings a month plus expenses.

  • 4caster

    The other problem is that some CEOs become too full of their own importance, and launch overpriced takeover bids or unequal mergers. Almost invariably these are destructive of shareholder value, particularly in the predator companies. But the CEOs still make a packet for themselves.

    • P Kralj

      They always take care of themselves. The Sunday Times showed a list of top CEOs with very disparate results. Their salaries were pretty similar.
      The most insiduous aspect of CEO pay however is the way in which they have manipulated share buy back schemes to suit their targets. CEOs have run out of ideas about how to make money so they buy back company shares. This increases the nominal value of the remaining shares and hey presto the CEO has met his target and he gets a large bonus. In fact he has merely declared that he has failed to come up with any new ideas.
      I do not criticise them for not having new ideas. Merely for pretending that they have some ability that the rest of us do not have.