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Tuesday, June 8, 1999 Published at 14:53 GMT 15:53 UK

Business: The Company File

Government set to pounce on fat cats

The Government wants boardroom pay more directly linked to performance

Britain's highly-paid "fat cat" bosses could be living on borrowed time.

The UK government's message is clear. Good investment performance deserves lavish rewards. But those failing to hit the financial mark should not get inflation-busting pay deals.

It has told industry unless it exerts self-discipline, ministers could give investors a veto on pay.

[ image: Fat cats may no longer get the cream in future]
Fat cats may no longer get the cream in future
Executive pay has been played up mercilessly by the tabloid papers and pored over by millions of readers, who got an average rise of 3.5% this year.

The average annual pay of British chief executives, meanwhile, rose by 8% in 1998, excluding options and bonuses.

This boosted the pay packet of bosses to £1.4m ($2.25m), according to consultants William Mercer.

Average earnings are less than £20,000 a year.

At a time when Labour has inflation-capped pay deals for public sector workers, and other employees are being told not to fuel a wage spiral, "fat cat" pay has become a politically charged issue.

So far, ministers have been happy to exploit the issue with rhetoric alone.

Attacking big salaries paid to bosses of privatised utilities proved to be a vote-spinner before Labour won the 1997 election.

But will new business-friendly Labour, as opposed to old corporate-bashing Labour, risk pouncing on the "fat cats" now it is in government?

Legislation - a last resort

The Department of Trade and Industry, which will publish a consultative document on executive pay next month, says it prefers self-regulation to intervention. New laws would be a last resort.

"Companies should be ... measuring pay against challenging performance criteria. If this doesn't happen, we have the option of legislating for a compulsory annual vote or even more rigorous measures," warned one government official.

No details were given on what form legislation might take or if a slot will be found in parliament's tight timetable.

Opposition industry spokesman John Redwood, a former Conservative industry minister, dismissed the government's plan as "a sop to the left which will achieve nothing.

More accountability

But shareholders' groups and the National Association of Pension Funds, responsible for one third of stock market investments, are in favour of tougher powers.

The business weekly magazine Investors Chronicle recently compared executive pay with that of international soccer stars.

But while footballers' pay is subject to performance on the pitch, the Chronicle accused corporate Britain of "Premiership salaries. Third division results."

One example cited was Royal & Sun Alliance. Its shares have underperformed the FTSE 100 and first quarter profits fell by 27%, but group chief Bob Mendelsohn earns £2.37m including a £225,000 bonus.

SmithKline Beecham Chief Executive Jan Leschly, who will earn £93m over 10 years, is a less clear-cut example.

While some shareholders complain about his pay, SmithKline has netted a 50% share price gain in the last financial year.

Boosting competitiveness

The government's justification for intervening in what is essentially a private sector matter, is its drive to raise UK industry's competitiveness - the battle cry of former Conservative prime minister Margaret Thatcher.

Last July, a spokesman for Prime Minister Tony Blair stressed the message of performance-related pay in the boardroom: "They have got to recognise the link between the pay rises that they award themselves and the overall state of the economy."

Performance-related pay has already been urged for workers in uncompetitive companies like car-maker Rover Group, which jettisoned old restrictive working practices in return for slightly above-inflation pay deals.

The new aim is to take the message from the shop floor to the boardroom.

But there is a flip side to the issue.

Figures from consultants William Mercer show that far from being overpaid, British bosses may be underpaid compared to their rivals in the United States - the most competitive market of all.

"In the US the average chief executive sits on share options of $40m. Base pay is 40% higher in the US and bonuses are five times higher than in the UK." said Mercer's senior consultant, Cliff Weight.

"Companies have to respond to the international pressures of the marketplace. There is a limited supply of talented chief executives and British firms operate in a global market. This will impact far more on pay than shareholder votes ever can."

On the continent, though, top managers are paid even less than their UK counterparts.

When Daimler-Benz and Chrysler merged, some German bosses found that they were earning a fraction of the salaries of their US-based employees.

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