Directors must justify huge pay deals

THE City has known for more than a decade that greed is good. Now industry is coming to the same conclusion.

Business Day has discovered a surge in seven-figure corporate pay packages, with one in five FTSE 100 company directors earning more than £1m a year. These are not just chairmen and chief executives but executives throughout the boardroom and even second-tier directors.

Companies argue that they need to make these huge offers because the business environment is global and directors would dash off to the US if they were not paid competitively. This sounds like a definitive argument. In practice, however, pay levels are still far lower here than in the States, so if money were the only motivation there would be no executives left in Britain.

The fact is that emigration is not a serious option for most directors. They would prefer to stay here, and be paid handsomely nonetheless. The principal dynamic behind spiralling pay comes down to keeping up with the Joneses. Pay is a key determinant of status and once a few executives start to receive £1m a year, their peers are keen to do likewise.

The Government and large shareholders say they are unruffled by boardroom pay levels as long as directors perform well. This has some logic. Strong executives can increase a company's market valuation by billions of pounds. Unfortunately, for every able corporate executive who sends the share price soaring there are many more who are enriching themselves while employees are laid off and shareholders are let down.

The link between pay and performance is still patchy. As rewards rocket, the need to bridge the gap becomes increasingly urgent.

The other side

BALLOONING pay does not increase motivation - at least not for all directors. A survey from recruitment group Reed shows that more than half of all finance directors would rather be doing something else.

Only 39% are happy in their jobs, 55% say they would rather switch and a pathetic 6% do not know if they would rather stay or go.

It gets worse. Of those who know they are unhappy, many would prefer to be teachers, a profession known for delivering the worst levels of job satisfaction in the country. Others say they would like to be football managers, professional golfers, TV presenters or pop singers.

Readers of this survey with a sunny disposition might think the finance directors' alternative career choices indicate what an imaginative and creative bunch they are. The more cynical might wonder if they really should be in charge of the nation's corporate finances.

Holders on hold
HAVING managed to sell its core business and the Channel Tunnel Rail Link in the past fortnight, Railtrack is working on how best to return the disposal money to shareholders. A simple dividend would be regarded as income and subject to punitive taxes, so directors are considering a voluntary liquidation, where the cash would counted as capital. Since most shareholders have lost money on their investment, the return would be tax-free.

Investors should finally receive their 250p a share by early in 2003. Those who want to get out sooner cannot because the shares have been suspended since October. Debates are afoot over when to seek a re-listing and a realistic date would seem to be some time in June.

Once the shares are re-listed, they will almost certainly plunge. But at least investors would be free to sell if they so chose. That option has been denied them since October. The sooner they get back the most basic of shareholder rights, the better.