Do your bosses deserve their money?

As executive pay soars, many fat cats are being rewarded for failure!

Britain's top earners are coining it in like never before, according to a new report into pay inequality.

Indeed, the 'pay gap' between fat cats and the rest of us is "widening to Victorian levels", says the High Pay Commission (HPC).

The return of Victorian values

In More for Less, its interim inquiry into pay published on Monday (16 May), the independent HPC pulls no punches. It launches a blistering attack on executive pay and bosses' bonuses, arguing that boardroom remuneration has rocketed in the past 30 years.

Indeed, the HPC warns that if fat-cat pay continues to rise at current levels, then the pay gap -- already at its widest since the 1940s -- will reach levels last seen during the worst of the Victorian 'poverty years'.

The following table shows how the rich have pulled away from the rest of us in the past 60-odd years. It shows the share of total UK income taken by the top 1% and the top 10% of earners:

Creaming off the cash

As you can see, the share of national income taken by the top 1% almost halved from 11.5% in 1949 to 5.9% in 1979. However, since then it has exploded, reaching 14.3% in 2005, and continues to grow.

Similarly, one in ten earners now take home over two-fifths (42%) of all the UK's income, putting them far in front of the typical Brit.

When fat cats get obese

The HPC's research also found that the top 0.1% of UK earners -- that's 48,000 people, or one in a thousand of us -- already pocket 4.5% of total national income. Alas, if this trend continues, then these fortunate few will grab a seventh (14%) of national income by 2030.

My next table shows the growth in growth in average earnings for FTSE 100 chief executive officers (CEOs) versus pay growth for the average worker:

Boardroom bonanza

As you can see, pay for top bosses more than tripled in the ten years to 2009, rising 203% from £1.23 million to £3.75 million. However, pay for the rest of us grew much more slowly, increasing by just 45% to £25,816 over this decade.

Today, FTSE 100 CEOs earn, on average, 145 times the average wage, with this multiple predicted to rise to 214 times by 2020, or £8 million a head.

In other words, the fat cats are now positively obese, while the rest of us try to get by on the crumbs from their table!

Whose fault is this?

In listed companies (those with shares quoted on the stock market), boards of directors are answerable only to one group: their owners, who are the company's shareholders. What's more, these shareholders generally are interested in only one thing: the returns they make from owning stakes in these firms.

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Hence, when share prices and dividends (the income paid by shares) are booming, shareholders don't complain about over-generous management pay. On the other hand, when share prices are slumping and dividends are being cut, shareholders start kicking up a fuss.

Another problem is 'corporate cronyism' among directors and pay consultants keen to benefit from rising, ever-more complex packages of pay, bonuses, shares and pension payouts. This corporate greed is often obscured by vague or incomplete information about boardroom pay.

Richly rewarded for success

Of course, some members of the corporate elite earn really do earn their money by producing bumper returns for their shareholders.

For example, take Bart Becht, who recently announced that he is to step down as CEO of Reckitt Benckiser, the Anglo-Dutch producer of household, health and personal-care products. In April 2010, the Dutchman attracted media abuse for his £90 million pay packet, largely made up of share options granted to him since the firm was created in 1999.

However, shareholders hardly have a bad word to say against 'Mr Cillit Bang', simply because he's made them very, very rich. In the past ten years, Reckitt Benckiser's share price is up 257%, versus a 0.4% drop in the blue-chip FTSE 100. Today, Reckitt is a £25 billion company, so Bart Becht has made his shareholders about £18 billion richer.

Clearly, no-one is going to complain about such outstanding success!

Bankers rewarded for failure

Then again, there are many, many companies where highly paid executives have presided over spectacular collapses in their share prices. The obvious example of such corporate excess is the banks, where executives banked bonuses in the millions while taking insane lending risks.

After bailing out the banks and preventing the financial system from collapsing in 2008, taxpayers today own 100% of Bradford & Bingley and Northern Rock, whose shareholders were completely wiped out. In addition, we own 84% of Royal Bank of Scotland and 43% of Lloyds Banking Group. Again, millions of private shareholders have seen their holdings in these banks fall in value by up to 95%.

Also, Barclays' share price is down 52% in the past ten years, yet CEO Bob Diamond and his crew are some of the City's highest-paid individuals. Global bank HSBC has also created many millionaires among its managers while they have presided over a 28% drop in its share price since 2001.

Bank shareholders should be livid that present and departed bosses have, in effect, been rewarded for destroying their wealth!

Rising pay, falling share prices

Furthermore, when you look at the ten-year performance of the shares of the UK's largest companies, it is clear that many of the corporate elite are making fortunes at the expense of their shareholders.

For instance, drug giant GlaxoSmithKline -- the product of two great mega-mergers during the boom years -- has seen its share price tumble almost a third (31%) in ten years. Nevertheless, 46-year-old CEO Andrew Witty (a GSK 'lifer') took home more than £8 million in pay and shares in 2009, his first year in the job.

Likewise, BP bosses have seen their remuneration rise enormously in the past decade, while the oil titan's share price has declined 28%.

In short, the link between company performance and executive pay seems to have broken down, thus allowing managers at the worst-performing firms to enjoy the same rewards as the best leaders!

Is your boss overpaid?

According to a recent YouGov poll, two-thirds of us believe that the pay gap in our workplace is too wide. Put another way, we think the corporate elite are well overpaid for what they do.

Likewise, a new ICM poll found that almost three-quarters of us (72%) think high pay makes Britain appear 'grossly unequal' and a similar proportion (73%) 'have no faith in government or business to tackle excessive awards'.

Scandalously high pay is unfair morally, socially and economically, and could -- in time -- generate serious unrest among the general public. Therefore, it's high time that the government, regulators and investors did something to curb corporate pillaging.

Otherwise, until we're all in the same boat, the rich will keep getting richer and the poor will keep getting poorer.

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