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A general rule to constrain executive pay

Financial Times

Published: June 12 2009 03:00 | Last updated: June 12 2009 03:00

From Mr Christopher Swain

Sir, Jeroen van der Veer deserves great credit for admitting that his performance would not have been different had he been paid 50 per cent more or 50 per cent less (“Departing Shell chief calls for pay shake-up”, June 9).

The implication must be that there are people prepared to fill such posts at much lower levels of reward, were it not for the drive to maintain status in terms of pay and comparability (as defined by themselves) with their peers.

We need to understand the dynamics of this “market”, which has played such an important part in creating the enormous differences in incomes that undermine society. It is a special instance of market failure.

The crux of the situation lies not in the relationship between participants in this so-called market at any particular level (restricted though entry may be), but in the inherent and universal features of the processes for determining rewards within the organisations that employ them.

It is the unrestrained autonomy of boards and senior management that have a common vested interest in colluding over rewards (as well as over promotion, ie, over entry into this circle) that propels the inexorable spiral in pay and other rewards, set against a background in which the sum of the rewards of those at the top has a minor impact on costs compared with a general increase in pay at lower levels.

If the challenge of widely differing incomes is to be taken up, without detailed interference from government, we have to give more thought to setting a general rule that either top incomes should be limited to a certain multiple of the lowest, or that the combined rewards of top management should not exceed a certain percentage of the organisation’s total pay bill.

Christopher Swain,
Henham, Herts, UK

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