Although he is a socialist in capitalist clothing, our Prime Minister never asks companies to pay their executives less. But heads of capitalist countries have no such qualms; as their countries get into trouble, they point their fingers at indecently high executive salaries. After banks started failing in the United States in 2008, there was much comment on executives paying themselves millions as their banks failed.

Britain has a conservative government which should be friendly to capitalists. But it appointed a High Pay Commission in November 2010. It has submitted its first report. It did not find much information on top executive salaries; apparently, British companies are quite secretive about them. But the report cites information from six big companies and banks. In these, executive salaries in 1980 were typically 13-16 times the average wage in the company; in 2009-11, they were typically 60-75 times the average pay.

The commission saw a number of dangers in this. The first was the risk of alienation: if people saw executives earning far more than they deserved, they would lose confidence in the fairness of the system. That was made more likely by the fact that the details and justification for executive pay were buried in voluminous, non-transparent company reports. The pay could not be seen as arising from the working of a market. If confidence in the pay determination process declined, it could undermine the political system and cause instability. The commission did not put it in such extreme terms, but it seemed to think that the growing inequality could lead to antisocial radicalism.

The commission made 12 recommendations. The first related to simplification of salaries: executives should be paid a basic salary. That cannot mean that executives should not get any allowances; the idea seemed to be that most of their pay should come in the form of an annual salary. More important, companies must publish the total pay of their executives and how it was made up. The commission also wanted each company to publish a list of the pay of its 10 highest paid employees “outside the boardroom”. I do not see the point of this; if the pay of all top executives was published, it would include these top 10. These salaries have to be approved by company boards, on which big shareholders are represented. The commission wanted the boards to disclose how these shareholders – mostly big financial intermediaries — voted.

The commission wanted companies to publish a statement of how their value added was distributed between wages, dividends, executive pays, taxes and reinvested profits. This can be easily gathered out of the companies’ profit and loss accounts. Then, the commission wanted shareholders to cast “advisory” votes on how executive salaries should be increased over the next few years. I do not see who would take such votes seriously.

The commission wanted companies to promote more executives internally because executives brought in from outside cost more. If it had looked more closely, it would have found that the best managed companies form the recruiting ground from which other companies “pinch” executives; if so, the process surely distributes managerial talent more widely.

The commission wanted companies to advertise for non-executive directors. This is a novel recommendation — replacing grace-and-favour appointments by an open process. But those who run companies want like-minded and cooperative people on boards; even if they advertise, that is unlikely to make much difference to who gets into boards. This idea is not much better than the Indian government’s of asking potential directors to apply to the Ministry of Corporate Affairs.

Britain apparently has remuneration consultants, who advise companies on what they should pay their executives. The commission finds that there is a conflict of interest between their remuneration counselling and other services, and would like them to do only one thing. This is unrealistic; they will probably set up separate affiliates to do the two types of work.

The commission wanted companies to publish fair pay reports, giving figures of salaries and how they are fixed. It would be easy to make up reports of this kind, justifying whatever the companies are doing or want to do; I do not think it will improve payments practices much.

The commission’s last recommendation was that the government should appoint a permanent commission like itself. I have shown above how limp its recommendations are. Maybe it thinks that practice will make it perfect.
 
The author is Consultant Editor of Businessworld. ashok.desai@gmail.com

(This story was published in Businessworld Issue Dated 06-02-2012)