THE publication of the High Pay Commission’s report last week prompted much comment when it found that remuneration for heading one UK bank has increased dramatically more than average wages over 30 years.
Coming on the back of last month’s Income Data Services report, which drew attention to the increase of total earnings for directors of FTSE 100 companies, it is easy to understand why the general public – let alone the St Paul’s protest camp – feels angered by the perceived disconnect and pay differentials between boardrooms and other workers.
But to make a fair assessment of current pay structures you have to look beyond the headlines.
If rewards are properly aligned with performance and do not jeopardise long-term stability through excessive risk-taking, there is absolutely nothing wrong with high payouts. And in a global marketplace, UK-based firms need to pay a competitive rate in order to retain highly mobile staff – or, equally crucially, attract new, talented individuals. The test of competitiveness isn’t staff who leave, it is staff who don’t want to join.
Where the business world differs, for example, from football is that the general public finds it difficult to gauge the difference in talent and performance between one executive and another. Enormous value can be added by key individuals but it is far less immediately obvious due to the many variables in play. Improving understanding in this area is much needed.
Remuneration has, in fact, been debated in City circles for some time. Progress has been made in improving overarching structures, with firms adapting practices in areas such as guaranteed bonuses.
Of course, we should not be shy in shining a light on this issue and some people in the Square Mile – as in any industry – are paid more than their performance justifies.
Despite this, it is not the role of government to set pay levels in private firms. For the vast majority of firms (those not currently owned or run by the government) remuneration is a matter for shareholders and we need to find ways to encourage them to take a more active role in ensuring remuneration is justified.
Proposals such as greater transparency might help in this regard, but we should be wary of unintended consequences. We have seen banks shed tens of thousands of jobs in recent months, partly due to the shift away from flexible bonuses to higher fixed salary costs that was encouraged following the financial crisis. (And see the article, right, on the perils of new simplification proposals.)
We must remember too that high pay brings its own opportunities to support wider society. Many people across the City make vast philanthropic contributions but choose not to make such acts public. The City has always thrived in the past by keeping its head down, but now is the time to make a noise about these efforts.
Such giving does not justify high pay – it should ultimately come down to performance. But it does show that City workers recognise the need to contribute to the wider community during this age of austerity.
David Wootton is Lord Mayor of the City of London.