Should top executives be paid so much more than their workers?

As the April pay reviews spark off the usual outcry over fat-cat bonuses, TUC research has confirmed the imbalance between...

As the April pay reviews spark off the usual outcry over fat-cat bonuses, TUC research has confirmed the imbalance between workers' and executives' pay. Ross Bentley asked two senior IT executives whether the discrepancy could be justified.

A TUC report, Executive excess - time to act, (published last month) revealed that the pay gap between directors and employees has continued to rise.

Between 1994 and 2001, basic pay rises for directors outstripped those for average employees by a factor of 3:1.

Analysis of companies' annual reports for the TUC shows that the median annual salary and bonus for the highest paid directors grew from £201,000 in 1994 to £416,073 in 2001, an increase of 107% over seven years. The median of average employee pay in the same companies rose from £19,272 to £25,223 - just 31% - over the same period.

We asked two senior IT executives whether top people were entitled to expect increasingly generous packages, and why lower paid workers should not complain when they get less.

Any director who has chanced his career in a high-risk job deserves a decent salary and some security against premature contract termination. Do you agree or disagree?

Geoff Finch: I agree. Most directors have spent their working lives developing the skills and experience to be eligible for that board-level post. When they get there it is often because the company is under-performing and the existing management will not or cannot correct the situation. The position is often precarious and short-lived. Should they be unable to rectify the problem, the directors run the risk of a tarnished reputation and reduced earnings, well below what they were receiving before.

Nick Hunn: I disagree. The past few years have increasingly engendered a spirit of wanting to have one's cake as well as eat it. We are all aware of the risks in the IT industry, but equally we are aware of the potential rewards. When I first became involved in technology there was a clear understanding of the different markets available and the associated risks. Those who wanted to play in the faster-moving and more exciting arenas acknowledged that compromise. Sometimes we got our fingers burnt, but as a result we learnt. The trend towards removing risk can lead to a less considered approach.

Company directors are usually guaranteed severance pay when they come on board. You cannot just refuse to give it to them because you think they could have done better. Do you agree or disagree?

Finch: I agree. Most contracts have performance clauses, so it is not just a case of pay-up and shut-up. Clearly there is a market rate for the job that reflects the risks involved. It is for the individual company to decide the risk/reward trade-off and if it gets it right the job will be well done at an effective financial cost, which will bring significant net benefits to the company's shareholders.

Hunn: I fully agree that if it has been offered it should be paid. But I question why it should be offered. The best incentive is to reward results. It is all too easy to be blinded by the bravura of some executives who want you to think that they are doing more than a job. It may be a more difficult or demanding job than others within the company, but I fail to see why these people alone should be safeguarded against inability. I would prefer to blow away the mist and judge on performance.

All too often company directors are overpaid executives who jump from sector to sector with no real expertise in any. Their PAs should be earning more than them. Do you agree or disagree?

Finch: I disagree. Most directors do not chop and change jobs. UK earnings are not high when compared to the world market rates for such people. Their total remuneration packages usually have a significant results-based element. If PA skills were as necessary and fundamental to the success of a company; this would be reflected in market rates.

Hunn: I agree. Unfortunately it can be all too true. There are some who have the flair and understanding to do this and do it splendidly. A breadth of knowledge and intuition will find its place in many situations. But reading a few business books and trying to emulate these peers by constant flitting is a recipe for disaster. I know of no other industry sector where I can meet so many chief executives who have no concept of what their company does or the market it plays in. As for whether their PAs should be earning more - I've come across a number of PAs who work on the same principle, so maybe they get what they deserve.

Performance related pay: top executives should be paid according to how well the company is performing instead of creaming off the profits and leaving the shareholders floundering. Do you agree or disagree?

Finch: I disagree, directors' total pay does reflect the current performance of an organisation. If directors' pay was reduced by half, in most publicly quoted organisations it would not significantly change the fiscal position of shareholders. However, paying well below market rates will attract mediocre people and in the long-term this could seriously damage the share price or, in the worse case scenario, prove fatal to the company.

Hunn: I agree. The past few years have seen two disturbing trends. The first is the denial of a long-term future in the rush for short-term cash and public offers, which at least the events of the past year have started to cool. More worrying is the belief that companies should reward mediocrity. We should reward on the basis of results: not on the basis of a CV; not on the basis of scaring the board; but on solid company performance.

Companies should be prepared to pay for the right people if they want to compete with US firms. High salaries and benefits are just a fact of life. Do you agree or disagree?

Finch: I agree, salary levels are driven by supply and demand. They reflect the economic value an individual brings to a firm. The organisation makes a profit from the deal. If it did not it would not enter into the contract.

Hunn: There is an interesting implicit assumption that the only thing that drives a successful executive is the high salary. It is a part of the equation, but so is the challenge, the company and the country they want to work and live in. Many of our competitors are European or Japanese. Their directors may not have such a high public profile or salary as their US counterparts but they are just as competent.

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