DEBATE: Are lofty chief executive salaries justified?

SportAccord - Day 4
WPP's Sir Martin Sorrell remains the index's highest-paid chief, despite taking a pay cut of more than £20m (Source: Getty)

DEBATE: ­­Following the publication of the High Pay Centre report, are chief executive salaries justified?

YES – Mark Freebairn, partner and head of the financial management practice at Odgers Berndtson.

Shock – a headhunter thinks people should be paid what’s needed to employ them. But let me explain. Imagine you own a technology business. It’s based in London and it represents your entire net worth. The chief executive is paid £x. She’s brilliant. She’s helped treble the size of the business over the last two years and has developed ambitious plans to turn it into the next Facebook. And then Tim Cook rings and asks her to join him at Apple on a typical Silicon Valley package. Do you let her go or do you respond? And if you respond, do you increase her salary? And is a salary high if someone would pay her more? There is a global market rate, and if we want our pensions to increase in value then we need the best people running businesses. And while UK executive to employee ratios can be high, they’re nothing when compared to the US. If Neymar gets paid more in a week than most bosses get per year, we might need to broaden out the debate anyway.

NO – Scott Corfe, chief economist at the Social Market Foundation.

Pay differentials are an important part of a vibrant and prosperous economy. The individual drive for a better lot – through hard work, promotion, and entrepreneurship – is the key enabler of economic growth around the world. The problem is when pay levels cease to reflect an individual’s talent or performance – something which is all-too-often the case. Studies show a negligible link between executive pay and company performance, particularly long term. Indeed, incentive packages often encourage chief executives to focus on the short term, discouraging investment in the future of the firm. Perhaps most worryingly, runaway and hard-to-justify salaries are corrosive, undermining faith in a market economy that, for the most part, does a great job in improving our lives. If companies don’t do more to justify pay levels, they risk falling victim to heavy-handed regulation or even nationalisation in the future. Forward-thinking boardrooms should recognise this risk.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

Related articles