Stunning Stats On Executive Pay

So while the great and good enjoy the sun, snow and schmoozing in Davos, I can’t help but wonder what they’ll have to say about executive pay. We’ve been hearing a lot about fat cats, bankers’ bonuses and spreading perceptions of inequality, even protests. But is it really that bad? Should you know anyone who’s going to the Swiss speech-fest, here are a few stats to enliven the conversation.

According to research by the University of Exeter Business School, executive pay is a 'potential timebomb'. Professor Annie Pye’s study reports that the average annual salary for a CEO of a FTSE 100 listed company was £150,000 in 1987. Today that figure is £4million.

Pye puts this down to the 'herd-like' behaviour of all involved in executive reward, who let’s face it, have everything to gain by driving the pay and incentive levels ever higher. Be they remuneration consultants and committees, head-hunters and recruitment agencies, and of course the directors themselves, there seems to be some scare-mongering that talent such as theirs is extremely scarce, so hey-ho, this is the price that has to be paid to get the best.

But are they the best? Prof Pye’s study points out that, whilst many current packages comprise a hefty element of future incentive, usually based on shares, there is an element of 'set and forget', meaning that the executive just carries on in their own sweet way. Links between actual performance and subsequent reward are tenuous or non-existent. In their defence, many executives would say that performance is seldom attributable to one director alone. However, it does beg the question: if they’re being paid all this money, what are they actually being paid for?

Worryingly, many of the study’s interviewees could see little if any hope of reversing the trend. Yet clearly this level of reward is not sustainable, let alone desirable.

The High Pay Commission has something to say about this. In their Cheques with Balances report, using data supplied by IDS, they have looked at directors’ remuneration for the period 1979-80 compared to 2009-11. The HPC is particularly interested in top pay as a multiple of average pay within the same organisation. So if you were an average earner back at the end of a decade of strikes and shortages, going into the decade of 'greed is good', your senior manager might well have been earning 15 times more than you.

Fast forward to the depths of the worst recession in generations, and the average earner would find that their top brass are earning in the region of 60 times what they’re getting. So the multiple has multiplied, fourfold.

OK, I’m generalising; there are organisations where the 1979-80 multiple was a mere x13 and is now a trifling x38. There is also a company where the 1979-80 multiple was x44, and in 2009-11 a staggering x113. In between are multiples and trends over time, from household names, that are eye-watering.

According to IDS, the average total earnings for a FTSE 100 director in the last financial year were £2.7million (this is all directors; Exeter was looking at CEOs), which represents an annual increase of…49%.

Yes, you read that right. 49% annual increase.

If these people were presiding over astonishing turnarounds (step forward Stephen Hester of RBS, not too fast now), recession-busting innovation and creativity, expansive job creation and generally making the world a better place, then let’s rejoice and hand over the money (or some of it). However, when the share incentives mature… will the fortunes of these organisations, and all they employ, and all they serve, have improved by anything like these multiples and percentages? Somehow I doubt it.

It begs the question: how does the average earner in a FTSE 100 company feel about their top managers’ pay package? Proud to be a part of it? Digging in with discretionary effort? Happy with their lot?