Leading Article: Thin excuses for fat cats

ONE OF THE guiding principles of Britain's Tory governments since 1979 has been that top people should be well-rewarded. If incentives were sufficient, executives would fly high and create wealth, the argument ran. Their rewards might seem excessive and unfair to ordinary people but they, too, would benefit - in the famous phrase, wealth would 'trickle down'. We know now that this was piffle. Pay packages of pounds 500,000 a year upwards have become commonplace for company directors, yet a fifth of the population is worse off than it was 15 years ago. Far from trickling down, the money has been swilling around in the boardroom trough. The beneficiaries are well-known. Peter Wood, chief executive of Direct Line, the insurance company ( pounds 18.2m); Lord Hanson, chairman of Hanson plc ( pounds 1.3m last year); Bob Bauman, chief executive of SmithKline Beecham ( pounds 2.1m); Michael Green, chairman of Carlton Communications ( pounds 630,000); Martin Taylor, new chief executive of Barclays Bank ( pounds 737,000); Lord Young, former Tory minister and now chairman of Cable and Wireless ( pounds 863,000); Sir Ian MacLaurin, head of Tesco ( pounds 967,000). As one current case shows, even the chief executive of a quite small company can now expect at least pounds 225,000, including bonus, even though the business has plunged, in a few months, from break- even to heavy loss.

Last week, as ministers struggled to square their calls for pay restraint among public sector workers with continuing evidence of executive greed in the private sector, the Prime Minister did not even bother to trot out the old trickle down argument. We are 'a free capitalist country in which companies determine their wages', he told the Commons. Free, perhaps. But not fair.

This is best illustrated by the use of the word 'competitive'. When companies talk about being 'competitive', they usually mean screwing down wages or sacking workers or both. They must reduce labour costs, they argue, to avoid losing market share to rivals. But at boardroom level, the word, along with the argument, is stood on its head. Paying 'competitive' salaries and bonuses means paying more than your rivals. Otherwise, your top executives may defect, probably overseas. The reality is that most British executives lack the know-how, language skills or inclination to work in comparable jobs abroad and, except in America, the remuneration package is unlikely to be higher. But reality rarely intrudes.

The simple reason - and the whole secret of the top executive merry-go-round - is that company directors award pay rises to each other. The only significant check is from non-executive directors but they are usually executives of other companies who have every interest in ensuring that their equivalents are well- rewarded. Several studies have failed to find any relation whatever between top executives' pay rises and company success. In 1991-92, top companies gave their directors an average of 13 per cent extra while average profits fell by 7 per cent. Sometimes, true, executives do so badly that they get sacked. But most people would be happy to lose their jobs on the normal boardroom terms. Two years' worth of those inflated salaries is usually paid in compensation. Why should a director object when he may be next in the firing line? Then there are share options, whereby directors allow each other to buy shares cheap at a moment of their own choosing in order to sell them at a fat profit, sometimes running into millions of pounds. In this way, top executives tend to benefit disproportionately from takeover bids.

All this might be acceptable if the beneficiaries were indeed wealth creators. But those who design and make, refine and improve, market and sell a product - engineers, scientists, television programme makers - are often not those who get the biggest share profits, largest company cars and most generous severance terms. In British companies, the finance director nearly always does better than (say) the chief engineer. And in recent years this inequality between the boardroom and the professionals who really count has grown at least as much as the inequality between executives and shopfloor. This is why John Major, if he wants to run a successful capitalist country, must find ways to curtail the freedoms so widely abused in company boardrooms.