THE FASCINATING HISTORY OF THE GREAT BRITISH EXECUTIVE PAY BOOM.

1985

The most interesting set of stories in 1985 related to that year's report from Lord Plowden on the Top Salaries Review Body, which looked at pay in the public sector. Lord Plowden seemed to take for granted that high pay in the private sector was a good thing, helping to promote the Thatcherite ideals of entrepreneurialism and wealth-creation. He then raised concerns about the poor morale of senior civil servants, part of which he attributed to the lower regard for public service as compared with the private sector. The report stated that 'We are left in no doubt that, in the present climate, pay and morale are inextricably linked'. The solution - give the mandarins higher pay!

1986

27th October 1986 was dubbed 'Big Bang' in the City and many stories were written during 1986 about the frantic efforts of financial institutions to attract and lock in talent. The swift expansion of the City as an international financial centre had already led to significant increases in earnings over the previous few years. American institutions had moved in, outstripping British salaries and heightening competition for talent. Nigel Halsey, managing director of Michael Page City head hunters, said that in the Eurobond field basic salaries had gone up between 75% and 100% in two years to the beginning of 1986. 'Golden hellos' were offered and bonuses of several times base salary could be earned.

1987

The aftermath of Big Bang featured heavily through 1987. There was increasing evidence that very high pay was filtering beyond the obvious areas such as City dealers.

There was also evidence that the filtering process was working at the very top, with the continuing trend of rapidly increasing pay. City salaries led the way, with Christopher Heath, Managing Director of Baring Securities, (remember them?) being paid £2.5 million but Sir Ralph Halpern of Burtons was leading the charge from other industries. He was paid £1.3 million and it could have been much more but for the scaling back of proposals to award him share options. Halpern was unhappy about any scaling back of his pay and tried to justify it in relation to others: "Nobody minds directors owning large stakes in their companies, which may be worth tens of millions, yet there is all this fuss about my salary." With hindsight (and possibly at the time as well) this seems a very odd complaint - of course no one would have minded if he had bought a significant stake in Burtons!

1988

In the world of executive pay, the biggest event of 1988 was the budget, which cut the top rate of tax from 60% to 40%. For business leaders this gave a huge boost to already soaring pay. Britain's 30 highest-paid directors earned an average of £534,000. More significantly, they enjoyed average pay rises of more than 25%, compared to inflation of about 8%. As far as they were concerned, this probably represented the final achievement of the Thatcher revolution for them - high reward and little complaint.

1989

Although it is difficult to pin down precisely, 1989 probably marked the turning point in attitudes to executive pay, with increasing accusations of greed and less support (partly due to increasing inflation and concerns about the economy). It was also the year when privatised industries became the focus of attention. These two issues came together neatly when Margaret Thatcher herself was reported as being "appalled'' at the huge salary increases for Britain's top businessmen in general and the 116% increase awarded to her old friend, Lord King, whom she appointed as chairman of British Airways, in particular.
Thus, the cracks were beginning to show but the international card could still be played, with the implicit suggestion that British directors required extraordinary increases to get them in line with others - presumably once that had been achieved pay rises would then reflect performance!
The 'international comparison fallacy', which allows companies to argue that general pay increases must be suppressed or jobs must be 'offshored' because UK wages are too high by international standards - whilst simultaneously asserting that their directors are paid too little is one of the more specious pieces of rubbish to litter the history of reasons for hiking executive pay.

1990

Average increases of top managers were nearly 28% over 1989/90, according to a survey of 250 companies by the P-E International Management consultancy. Again, this was contrasted with performance since, in the period surveyed, the companies' sales rose by just 12.3% and profits by 19%.

1991

Iain Vallance, chairman of British Telecom, was reported as receiving a salary increase of 16.5% (again quoted as "more than four times the rate of inflation") and was roundly condemned. He could not easily resort to the international comparator argument as it emerged that he was paid much more than his European and Japanese counterparts (albeit considerably less than some American telecom chiefs). He did however, come up with a truly novel reason, describing his pay as "Compensation for appearing on the front page of the tabloids. This is a high-profile job and, whether you like it or not, you get a fair amount of media attention. I can't say I relish it."
Elsewhere, Sir Ralph Halpern, who was the first British businessman to earn £1 million a year managed to go out with a bang. When he was sacked in November 1990, he took a pay-off of £2 million plus a £450,000-a-year pension.

A survey by the Financial Times continued the theme of a growing disparity between what British directors were paid and the performances of their companies. Britain's 70 most senior industrialists were awarded increases averaging 350% between 1981 and 1990, far outstripping the average increase in their companies' average earnings per share of 166%. The survey showed that total pay, before tax but including performance bonuses, rose from an average of £88,340 in 1981 to £398,830 in 1990

1992

The Cadbury code of corporate governance was published in 1992, marking the start of an era which is continuing today. The hope was that companies would be shamed into compliance.
Sir Adrian Cadbury, the chairman of the committee, tackled the issue of board appointments (and indirectly, pay), "Up to 80% of outside appointments to the boards of large British companies are still made on the old boy network".

1993

A letter to the chairmen of Britain's 100 largest companies, written by Alastair Ross Goobey, chief executive of Postel, which handled the (at the time) £20 billion pension funds of BT and the Post Office marked a new chapter in corporate governance and executive pay . It began innocently enough, discussing the need for a closer relationship between shareholders and companies. But it ended up as one of the most devastating attacks on executive excess from within the business establishment. A particular area of concern was length of contracts and executive pay-offs and the letter went much further than the Cadbury report, "Too often recently we have read of senior executives who have been deemed to have failed in their role but, as a consequence of their contract, have been paid off with substantial sums".
Even among those who supported Ross Goobey's initiative, there were few fund managers prepared to be as prominent as Postel and its supporters in adding their weight to the campaign. This reluctance raised more issues about the motivation of fund managers. The bulk of institutional money comprises pension funds managed by City firms on behalf of big industrial companies; if they were to take action against executive contracts, they would in effect be waging war on their own clients.

1994

The steady trickle of complaints about greed amongst bosses of privatised industries suddenly became a torrent in November 1994. In some ways Cedric Brown, ('Cedric the Pig', according to some) the chief executive of British Gas, was unfortunate to be the focal point of the torrent. The criticism centred on Brown's '75% pay rise' from £270,000 to £475,000. In fact, Brown would have earned more than £400,000 anyway, payable under the former bonus scheme that was scrapped as part of the change, along with his automatic share options. The most innovative feature of the new pay system was a share-option/bonus scheme designed to reward directors for increasing shareholder value over the long term. Even within British Gas, Richard Giordano, one of the first US imports to come 'over here', looked the more logical target as he was paid £450,000 for three days a week as chairman. The basic pay of the executive directors had been calculated to put them in the median level of big British companies such as BP, ICI, Guinness, BAT and Giordano's former company, BOC.

The outcry gave impetus to an initiative by John Major and he set up a special cabinet committee to examine shareholders' powers to control boardroom excesses. The new committee (which never came to any conclusions as far as I can tell), chaired by David Hunt, Major's cabinet fixer, included Michael Heseltine, the Board of Trade president, and Kenneth Clarke, the chancellor (now chairman of BAT plc) and considered amendments to legislation, particularly the Companies Act. Major refused to condemn Brown's rise but renewed his criticism of excessive pay increases.

1995

The torrent prompted by Cedric Brown continued throughout 1995, reinforced by the deliberations of a new committee.

The next steps in the debate had already moved outside parliament by the announcement of Sir Bryan Nicholson, president of the Confederation of British Industry (CBI), setting-up of a committee to study the creation of a code of practice on regulating executives' rewards. Headed by Sir Richard Greenbury (remember him?), the chairman and chief executive of Marks & Spencer, the committee included some of the leading names in the industrial establishment.
To some extent the Greenbury committee took over from the cabinet committee, as the government preferred the industrial establishment to sort itself out rather than resort to legislation.
Gordon Brown, then shadow chancellor, added his contribution to the issue, saying: "The whole country will be appalled by the unfairness of the boardroom excess on a scale unrelated to performance, while the majority have seen wages and salaries stagnate. The boardrooms have become the country's jackpot winners even before the national lottery began. We are witnessing the irresponsibility of the `I am all right, Sir Jack' society." (Hmmm, haven't heard from him lately).

The report of the Greenbury committee was published in July and, in summary, the Code it recommended included:

1. The Remuneration Committee: this should consist entirely of independent Non-Executive Directors and have the power to establish policy on executive remuneration and to determine specific packages for individual Executive Directors.
2. Disclosure and approval provisions: the remuneration committee should make an annual report to shareholders, including both the remuneration policy and the detailed remuneration of each executive director.
3. Remuneration policy: Remuneration committees should aim to pay enough, but no more than enough, "to attract, retain and motivate Directors of the quality required".
4. Service contracts and compensation: generally notice periods should be one year or less. Remuneration committees should "take a robust line on payment of compensation where performance has been unsatisfactory".

1996

The Greenbury report continued to feature heavily in stories during 1996.
The Church of England moved away from its traditional passive stance in response to fat cat stories and Greenbury. The Venerable David Gerrard, a General Synod member of the Church Commissioners, said: "We realise money is not neutral and we can influence companies' policies and force them to be more responsible. We have our own code which says it is wrong if the workforce is being paid little while the management is paid millions. Why shouldn't we use our money to change companies' policies?"

Even in the City, high pay was getting some bad publicity. Rudi Mueller, chairman of UBS UK, said: "The whole system has gone crazy. It is totally out of hand. The cost base for everybody is going up so dramatically that if we have the slightest downturn in the market, we shall see casualties unheard of in the past".

Another committee, this time under Sir Ronald Hampel, the chairman of ICI, was established in November 1995 and carried out most of its work in 1996. After a year, Hampel seems to have been a little weary of the issues of corporate governance and boardroom pay: "I have not spoken much on the subject," he said. "It has already become an arena for comment, with numerous conferences and consultants offering advice. For us, the primary requirement of governance is to create an environment in which businesses can prosper and thrive. And that seems to have been forgotten in some of the hysteria surrounding the subject." (We're still waiting- see Corporate governance section).

1997

In an election year all issues tend to get political and in 1997 the Labour party announced that it would, if elected, introduce a windfall tax on the shareholders of privatised utilities. Somehow, this was supposed to redress some of the excesses on pay and profits but exactly how it would have such an effect was never clear.
The interim report of the Hampel committee was published in August. Its position was clear from the first paragraph, which included: "The importance of corporate governance lies in its contribution both to business prosperity and to accountability. In the UK the latter has pre-occupied much public debate over the past few years to the detriment of the former. We would wish to see the balance corrected."
Some professional groups thought Hampel had not gone far enough and there were some comments from old Labour about the pre-eminence given to shareholders rather than stakeholders. Austin Mitchell, the MP who made his own submissions to the committee, said: "If this is the best the fat cats can come up with, new Labour must reform corporate governance and develop the stakeholder economy on its own."

Finally, there were the first signs of trouble with the consequences of the trend towards codes, regulations and 'best practice'. Many companies appeared to be simply copying pay structures (in particular incentive plans) from others.

1998

The Hampel committee's final report was published at the beginning of 1998, followed in June by the Combined Code (embracing Cadbury, Greenbury and Hampel). This enshrined the principle of 'comply or explain'. In theory, this leaves companies completely free to do what is best for their specific circumstances but in practice is a strong incentive to conform because explanation can be time-consuming and costly and may fall on deaf ears in any case.

The Combined Code produced the following wonderfully anodyne formula for executive pay, "Levels of remuneration should be sufficient to attract and retain the directors needed to run the company successfully, but companies should avoid paying more than is necessary for this purpose. A proportion of executive directors' remuneration should be structured so as to link rewards to corporate and individual performance."
Despite all the bad publicity, pay continued to go up. The pay of top FTSE 100 executives increased by 45% over the previous year and the average was by now over £1 million. There were some loud protests, for example John Edmonds, the Trades Union Congress president, sounded very much like old Labour at its annual conference: "A company director who takes a pay rise of (Only! Many took much more) £50,000 when the rest of the workforce is getting a few hundred is not part of some general trend, he is a greedy bastard."

1999

The year started with rumours that the government was considering new rules (either through direct legislation or via Stock Exchange requirements) with respect to directors' contracts and pay. The rumours may well have started with the government itself as it wished to judge the reaction before committing itself to anything. Stephen Byers, the Trade and Industry secretary, wrote to the Financial Times to clarify his position, although the letter did not clarify much. In it he said "The government has not taken a decision to legislate in this area but, equally we have not ruled out legislation. Before making a decision we will consult with business and institutional shareholders and will monitor the forthcoming round of annual meetings closely for evidence of a more positive and responsible approach from companies and their shareholders."
By the time that Byers came to report on his review, the government had softened its stance as it wanted to be seen to be a supporter of business. He said "I am determined that the issue of directors' pay should be taken as part of the overall agenda on UK competitiveness. I want world-class companies to flourish in the UK, and those companies must be able to offer internationally competitive packages to attract top business people. The debate is not about levels of pay, but the link between pay and performance. I want to see companies strengthening the link." Even the Labour party had now swallowed the internationally competitive argument!

2000

The government continued its search for a way to be seen as both pro-business and anti-fat cats, particularly in the privatised industries. Stephen Byers proposed that those in charge of utility companies should be forced to compare their annual salary and share-option increases with the treatment meted out to customers. Water, electricity and gas companies that continued to have their prices set by a government-appointed regulator would be obliged to fall in with the new regime or face fines. The firms affected - BG and Centrica, plus the privatised water and power companies - would have to publish customer-service records alongside executive remuneration details each year. The idea was that executives would think twice about increasing pay when, for example, repair waiting times were increasing.

Finally, 2000 produced a new area of concern - the 'transaction bonus'. In particular, there were complaints when Chris Gent, chief executive of Vodafone, was reported to have received a bonus of £10 million for successfully completing the takeover of Mannesmann, the German telecoms company. The thrust of the complaint was that if chief executives were paid bonuses for simply completing a takeover then there could be an incentive to overpay for the business being bought. This can be seen as part of a much wider issue of pressures on executives to grow businesses through acquisitions.

2001

Transaction bonuses continued to make headlines as the Royal Bank of Scotland (RBS) paid £2.2 million to four executives for their work on the takeover of NatWest. In this case, everyone seemed to agree that the takeover was good news for RBS shareholders (who presumably would be happy to reward such success) but the objections were on a point of principle. The National Association of Pension Funds (NAPF) went to the extent of recommending that its members vote against the re-election of two members of Royal Bank's remuneration committee - Sir Iain Vallance, the BT chairman, and Sir Angus Grossart, the Scottish investment banker.
Sir George Mathewson, incoming chairman of RBS did not help matters when he claimed that the bonuses "wouldn't have given you bragging power in a Soho wine bar".

The volume of stories about boardroom pay had never returned to its former trickle after the Cedric 'The Pig' Brown' episode of 1994/95, but starting in 2001 there was a significant increase and a second torrent began.
The story of Marconi is a tragedy which has been covered fully elsewhere but perhaps the biggest single cause of outrage was the payoff to Lord Simpson of Dunkeld, the former chief executive who took much of the blame for Marconi's collapse. Marconi said that Lord Simpson had agreed to a compromise and would receive £300,000 as compensation for "loss of office" - far below the £1 million entitlement under his one-year employment contract. However, Marconi confirmed that Lord Simpson would also receive pension entitlements under the funded unapproved retirement benefit scheme (FURBS). These were estimated at £1.2 million. The total of £1.5 million gave considerable ammunition to those complaining about 'reward for failure'. Earlier in the year Gerald Corbett received £1.3 million after his period at the helm of Railtrack. His 'failure' (at least in commercial terms - the Hatfield rail crash happened during his tenure) was nothing compared to Marconi, which involved a collapse in market value from over £30 billion to virtually nothing and the loss of over 8,000 jobs.
Patricia Hewitt, the Trade and Industry Secretary, said that "when workers are losing jobs and investors are losing money then company directors should be sharing in the pain". Roger Lyons, general secretary of the MSF, said: "This is outrageous and a slap in the face for the workforce and shareholders alike."

2002

In the middle of 2002 another committee was formed. Commissioned by the government and led by Derek Higgs, it was to be "A short independent review of the role and effectiveness of non-executive directors". The review was to build upon Cadbury, Greenbury and Hampel (plus the recent Company law Review and Myners Report). Since one of the key roles of non-executive directors relates to the remuneration committee the review was bound to keep executive pay in the headlines.

Jean-Pierre Garnier, chief executive of GSK, had always attracted some publicity but in 2002 he started to get more prominence and has rarely been out of the spotlight since. In the three years to December 2001 he was the highest paid chief executive in the FTSE100, receiving £24.2 million. Despite this, GSK proposed a significant increase to his pay. In its letter to institutions, GSK stated that its remuneration committee "intends to recommend a higher quantum of long-term incentive grants for Garnier, so as to more closely align his incentive plans with those of other chief executives in Glaxo's peer group".

2003

The torrent reached full flow in 2003 and there were some signs that pressure from institutions was having an effect. Charles Allen, Granada's chairman, renounced his two-year contract, which would have allowed him to walk out on the television group and still collect £2 million in order gain support for the merger with Carlton. However, despite some public successes (and many more private discussions between companies and shareholders which led to modified proposals) there were many negative stories and calls for further action. Payoffs such as the £1.7 million to Bob Mendelsohn, chief executive of the Royal & Sun Alliance until the previous September, kept up the pressure for action on "golden goodbyes".

In June, the DTI published (yet another) consultative document - "Rewards for Failure" Directors' Remuneration - Contracts, Performance and Severance. In it, the government held out the possibility of further best practice guidance and/or legislation. One specific option considered was the capping of payments at six months' salary, but this was never followed through.
A better target for complaints about boosting pension unjustifiably was Jim Forbes, the retiring boss of Scottish & Southern Energy (SSE), who had the capitalised value of his pension increased by one third to £7.2 million after an end-of- career salary rise and a 'secret' pensionable bonus payment (pensionability of bonus was contrary to all best practice guidelines). Forbes, known by staff as "Jockweiler" for his relentless cost-cutting, retired on an annual pension of £509,000 but only after the remuneration committee reclassified a £114,000 bonus to Forbes as salary in a move that increased his pensionable pay. In the final six months of Forbes's 38-year career, the board also decided to raise his pay by a third.

As mentioned above GSK continued to attract the headlines, particularly after it became the first company to have its remuneration report voted down. Much of the criticism was aimed at the chairman, Sir Christopher Hogg, whose reputation had been built over many years but seemingly wrecked overnight. Ironically, Hogg had been a critic of excessive pay in the privatised industries and way back in 1991 he said: "I am a little surprised that they appear not to have anticipated the indignation they would cause. I think running a business is about building for the long term, and there is a whole mass of people on whose efforts you have to rely. Anything which tends to destabilise that, to cause confusion or lack of comprehension between the top and the bottom - and pay rises are a very good example - is really detrimental to the running of the company".

2004

The torrent shows no sign of slowing down. One of the problems now is that pay is becoming ever more complicated and interpreting it can be difficult. As Stella Brooks of Inbucon, a pay consultant, said: "Ten years ago executive pay was much more simple. Most directors were awarded basic pay, plus a bonus and some share options. Now schemes are made up of these components, plus a range of long-term incentive plans, both guaranteed and performance-related. They are often staggered over a few years, too."

In terms of sheer size of number, the prize goes to Goldman Sachs and the bonus reported to be worth £30 million that it paid to Driss Ben-Brahim (although Goldman did dispute the calculation). Even allowing for some possible exaggeration, this confirmed that however much the bosses of large companies were being paid, a top City trader could make far more.

In an interesting postscript to the collapse of Marconi (see 2001 above), Mike Parton, its chief executive, received £5 million of a potential £22 million bonus for turning the company around and completing its financial restructuring much quicker than expected. He will receive a further £8 million if the share price recovers to over 750p within the next four years. The irony of these payments is that Parton was part of the management team that led Marconi to its collapse and it now appears that he will be much better rewarded for the (partial) restoration of the company than he would have been had it continued on an even keel.

Finally, pensions made the headlines again in 2004 with the publication of the second TUC Pensions Watch survey. This showed that that the average pension for a director was £169,000 a year, compared to £6,300 for the average worker and average contributions were 20% of salary for directors compared to 6.5% for others. Brendan Barber, TUC General Secretary, said: "Employees in every sector have seen their pensions under attack in recent years. Fat cats are still supping the pensions cream and have taken little or no notice of business leaders or ministers who say they should set an example."

Plus ca change - will it ever?