Sand in the public's eye

Gasp in gratitude to the Bank of England for saving the banking system in 1991. Roar with approval at the Governor-designate's five-year pay freeze. But a raspberry to the present Governor and the whole Court of the Bank for what they have done to undermine pay restraint.

It would, of course, be wrong to claim that the news from the Bank of England has been stage-managed. But by coincidence the Governor- designate's public-spirited pay freeze last week has overshadowed the impact of what has turned out this week to be a very large earnings rise indeed, of almost 18 per cent, in his role as deputy for the year to February 1993.

The retiring Governor had an even bigger increase in remuneration, part of which, like his deputy's, was due to the Bank's decision not to let the Inland Revenue get in the way of the overseas duties of directors' wives. This emerged on the day the Bank made the startling admission that preventing a crisis in the banking system cost it pounds 115m.

The facts behind the smokescreen are that the Governor's remuneration actually rose 27 per cent in the year to February. As the table shows, this is six times the underlying rate of earnings inflation in the economy. Compensation for back tax payments on travel benefits for the Governor's wife is included in this figure.

Annual reports often try to bamboozle shareholders by ascribing part of a top pay increase to special factors. While our understanding of what goes on is improved by additional information, the bottom line is nevertheless total remuneration, in this case reported in the Bank's table of directors earnings.

But let us charitably ignore the tax compensation. The Governor still earned nearly 18 per cent more last year than the previous year, which is four times the rate of earnings inflation and 12 times price inflation.

At this point the great and the good enter the argument with their own special brand of understanding for their peers. Many variations on the theme are trotted out in annual reports when large earnings increases have to be justified. Some is legitimate, much is not.

They may claim a straight link to performance, when profits are rising, though the higher the gearing to profits the less likely we are to see the arithmetic. There may be time lags, because of long-term bonuses, to justify rising pay when profits fall. There could be a special link to the profits of a subsidiary. Or the competitive executive market may have forced the board to agree gold- plated contracts.

A variation on this market argument, useful when all else fails, is comparability. This is the Bank's argument for driving a coach and horses through pay restraint in 1991 and 1993.

Sir Adrian Cadbury, expert on corporate governance and chairman of the Bank remuneration committee, backed the increases by saying the most senior jobs in the Bank demanded skills and experience that attracted high rewards elsewhere. The Bank had to attract, retain and motivate these people.

The argument is often right in the private sector. But in the public sector there are other compensations, not least of which is the exercise of power and influence at the centre of events. Why else is the Prime Minister worth a mere pounds 76,234 and the permanent secretary to the Treasury pounds 104,860?

Even if Sir Adrian is right about what the Governor's job is really worth, Robin Leigh-Pemberton, backed by Eddie George, his deputy, was for years at the forefront of calls for pay restraint. In the public sector at sensitive times like this it is the rate of increase that counts, not abstruse arguments about the absolute level.

There is more sand in the public's eye from the Bank: all this took place at the beginning of 1992, when the last salary increase was implemented. We have only just found out about it now with the report, because the Bank financial year starts two months after the salary changes.

Sir Adrian says the pay scales reached the right level a year ago, and there was no increase this January. A bit late, you might say, since earnings inflation in the rest of Britain had already dropped back sharply, with no help from the Bank's example.

----------------------------------------------------------------- GOVERNOR'S PAY ----------------------------------------------------------------- Governor's total remuneration, excluding pension contributions Year to Feb pounds Rise National % average rise % 93 209,165* 27.0 4.50 92 164,311 5.9 7.50 91 155,019 17.0 9.25 90 132 558 4.3 9.50 89 127,121 3.9 9.25 88 122,348 22.9 8.50 87 99,550 10.5 7.50 86 90,085 5.9 7.50 85 85,095 4.5 7.50 84 81,533 - 7.75 *193,309 (17.6%) before compensation for back tax on notional benefits of governor's wife's travel at Bank expense. -----------------------------------------------------------------