CEOs should not be paid for risks they do not bear

Being a chief executive of a major company is a relatively low-risk job in comparison with many other sorts of work, a new paper argues. Therefore, the old arguments about risk and reward traditionally deployed by those seeking to justify growing chief executive pay packets cannot be sustained.

In a new paper, published today by The Work Foundation, Nick Isles presents research that shows that FTSE 100 CEOs suffer little more risk of being fired and made redundant than the average worker. In addition, they will tend to live longer and are cushioned from falls of grace by large pension pots and sizeable pay-offs.

Nick Isles says: ëPeople instinctively understand the difference between risk-taking entrepreneurship and able stewardship of an organisation. What the paper shows is that the levels of risk borne by CEOs are actually quite modest.í

The paper analyses data from a 12-month period and compares the labour market outcomes of the CEOs of the FTSE 100 in that period with whole-economy labour market data.

For the year to summer 2006 average CEO remuneration packages increased by 28% against inflation of 2.8% and average wage increases across the whole economy of 4%. Average FTSE CEO remuneration topped 2.4 million up from 2.1 million the year before. Performance related pay made up 55% of the total, up from 46% in 2003.

Between 31 July 2005 and 31 July 2006 FTSE 100 CEO turnover stood at 14%. The national average was 18.3% and in the private sector 22.9%. The public sector by contrast stood at 13.3%.

Of the 14 FTSE 100 CEOs who left their posts during the measurement period only one was made redundant. He left with a pay off of 5 million. In contrast, over the course of the same time period, national redundancy rates for all groups of workers averaged out at around 0.58% and for men the rate was near 0.8%. A man on average male earnings of 25,800 per annum with average tenure of 7.5 years would receive around 3,700. The FTSE 100 CEO who was made redundant received a pay off more than 1,350 times that.

Nick Isles says: ëReward should go to the talented, the able, the entrepreneurial and the wise. But let us not base arguments about reward on myths about risks that are not actually present. A winner-take-all market has developed among top CEOs and nothing seems able to stop it. If we pay our top public servant ñ the Prime Minister ñ 186,000 a year why do FTSE 100 CEOs deserve more than 15 times that for stewarding their companies?

ëThe basis for paying such large and inflationary pay increases to CEOs is a perversion of market principles. Growing pay inequality corrodes the basic concept of fair reward that underpins a thriving society ñ and may also damage the performance and long-term success of organisations as staff become cynical and disillusioned.í

In addition to progressive taxation to put a brake on excessive pay, the paper calls for a High Pay Commission to be established ñ on the model of the Low Pay Commission. This would set reliable benchmarks and make public recommendations to company boards. Representation on those boards should include workers and other stakeholders.