In defence of corporate salaries

Comments (5)

I’d like to start this piece with two disclaimers. First, this is not intended as a justification of large remuneration packages for executives. Second, nor is it an article saying it’s right that someone earns 100 times what someone else does. But this is an article attempting to look at the other side of the debate. And it is written from a personal perspective, as an observer of the debate. This is not a headhunter trying to curry favour with their client base, or justify fee increases

We have to make a choice in this country. We either pay market-rate salaries and give ourselves the best chance of employing superb people, or we rely on extraordinary people deciding to do a job for far less than they could earn somewhere else. The only other option is to accept that paying below market rate gets us the equivalent employees. Large shareholders are comfortable with the first option.”

I wrote the above in 2012. It was for an article defending Stephen Hester’s right to take a bonus where the criteria attached to it had been set three years before, where he had hit the criteria needed to trigger a bonus and where he was not receiving a full bonus because he had not hit every criteria. But people in positions of mass influence decided that this was unacceptable and we all know what happened then.

Yes, I am a headhunter writing in support of people being paid large salaries, and I know how it might look. But that does not change the fact that the first paragraph holds true. It might be worth me explaining why I believe this is so high profile now, and why taking an insular view will impact our competitiveness in the future.

Simplistically, how do you define what number is too big?

I think anyone earning £1m a year or more is earning a very large amount of money. These sums are not trivial. I’m also conscious of the other argument against large salaries, namely how a banker compares with a nurse in terms of earnings and impact on society. I write this as the son of a teacher.

The challenge is that a vocational role will always be rewarded on the basis that most people doing it will do it for the bare minimum. In a capitalist world, if you can’t show the financial effect of your work, you can’t argue for a percentage of it. Again, this is an oversimplification but worth bearing in mind.

People leading businesses have always earned substantial sums of money. While there have been grumbles about this over the years, there has never been the sort of public outcry we are seeing now. So why is this? Well, I am reminded of an episode of Have I Got News For You several years ago. There was, for the time, the usual piece about MPs’ expenses.

One of the guests was Reginald D Hunter, the American comedian. After listening to the four British people on the panel for ages, he asked a few questions – the gist of which was “has this just started or has it been happening for ages?”.

If we are not careful we will start to hurt this country's ability to ensure the finest people globally are running our enterprises

Upon hearing that it had been happening for ages, he questioned whether the public outrage was a recent development. When the answer was “yes”, he basically said: “So, what you are telling me is that when everyone had enough money no-one cared about what the MPs were doing, but now the economy is in trouble, and people have less money, everyone cares?”

I feel the argument about remuneration does the same. If we are not careful we will start to hurt this county’s ability to ensure the finest people globally are running our enterprises. And that can’t be good for everyone.

But it’s when you turn to the numbers themselves that you hit an issue. Simplistically, how do you define what number is too big? You can look at multiples of the average national salary, or the average salary within an organisation. You can look at what feels morally like too big a number. Or you can make a comparison to what the prime minister earns. Or, as one Sunday paper did, to what the Archbishop of Canterbury earns. These are all arbitrary parallels. And none of them factor in that we work within a global context that continues to feel far smaller.

If we want the UK corporate world to play on a global stage and win, and offer an environment that global enterprise wants to trade with and work within, then we have to operate on that basis. That means we need a tax structure that the world is comfortable with, an employment environment businesses can work under and a remuneration system that encourages the world’s best talent to view the UK as a good place to do business in.

If you are a business person able to work globally and you are sought after, you can choose where you work and which organisation get the benefit of your experience and ability. Your first choice is likely to be a business based in the US. If you deliver, you can earn £200m over five years and be feted as a wonderful human. Your second choice is a UK-based business. If you deliver you can earn £15m over five years and be vilified in the press on an annual basis.

To be clear, I am not suggesting that £3m a year is not a lot of money. It’s a fortune. But when taken in context, against the global market place businesses work in, in the competitive world we all work in, factoring in the rewards paid to other executives in different countries, it does not look quite so outrageous.

If the large shareholders are comfortable paying global market-rate salaries, maybe its time the press and the public were, too.



Mark FreebairnMark Freebairn is partner and head of the Financial Management practice at Odgers Berndtson




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  • Comment by Anonymous

    Sorry I disagree with this article which is naive at best. There are loads of capable people who just aren't developed because those at the top have a vested interest in keeping good people out so they can keep the privilege and enormous salary to themselves. Not everyone behaves like this but in my experience its significant. Who gets those positions / salaries doesn't always correlate with ability anyway - sometimes frankly, its how your face fits or that you are a "yes" man. Countless people make fortunes even whilst not doing a very good job at all - and by the time they are weeded out they've already been paid a fortune.

  • Comment by Bob Apple

    I agree with Steven to a degree, but the starting point for this to be 'broken politically' is a democratic mandate to do so. Until we have a realistic alternative to the three main parties who in reality all occupy the narrowest of narrow strips on the centre ground, the status quo cannot realistically be challenged. Having company employees on remuneration committees is Labour's frankly laughable response to this issue! With regards to Fred Goodwin, Andy Hornby et al, company directors have a fiduciary duty which if they fail to adequately fulfil can and should lead to criminal sanctions. Not sure why this hasn't happened.

  • Comment by D James

    There are two things which annoy me about top directors' pay. The first is the apologists for boardroom excesses who ignore the consistent failure of remuneration to reflect the directors' performance, and this article is a good example of this. Steven's absolutely right about the absence of a true free market - the chaps whose faces fit are in a cartel, whose members help each other's salaries up and in so doing justify their own next raise by reference to the inflated rates they have helped to cause. The second is to see Fred Goodwin, Andy Hornby and their accomplices who lined their own pockets while destroying the banks for which they had responsibility and, in the process, did the wider economy no favours, yet are still claiming huge pensions (now state-funded!) as a reward for these efforts. Anyone who cannot see there is something badly wrong with this remuneration model is choosing not to look.

  • Comment by steven

    You are totally missing the point. WHY is the market rate for that level of talent so ridiculously high? Well, its because all over the world, big corporate groups set their senior pay levels in remuneration boards which are cross-peopled by (mostly) men who - while they may be very talented - are massively overpaid. It is (informal) price fixing, i.e. a cartel. That is the problem, and most shareholders (the most powerful of whom are themselves big corporate groups led by the same group of over paid men) have no interest in resisting this, despite the impact on real returns. If actual savers and pensionholders had any influence (which they don't), i.e. teachers, nurses etc. things would be different. So, your free-market defense argument fails at the first post because this is not a free market! Its a cartel. And like any cartel, for the public interest it should be broken politically (e.g. not by a silly press witchhunt again particular high profile CEOs).

  • Comment by Elaine Clark

    IMO a lot of the outrage is directed as those paid large salaries and bonuses for failure whether by bad financial results or inappropriate practices e.g. LIBOR, PII selling etc. You don’t seem to have addressed that in your article. World class salaries for world class people may be a valid argument but outrage at large remuneration packages for very poor performance and unethical or illegal corporate behaviour seems entirely justified. Are shareholders really happy with the packages paid? I don't think shareholders at Aviva would agree with you.