View from City Road: Clarke's late conversion on pay

The world is a rum place when even Conservative Chancellors of the Exchequer belabour high pay for executives. Where, one wonders, was Kenneth Clarke when his predecessors cut top tax rates, or introduced reliefs of particular benefit to high-income earners, such as business expansion schemes? Still, better a late conversion than no conversion at all.

Some executive pay packages have indeed become very silly, although it is instructive that most businessmen who criticise them - look at Lord Weinstock yesterday - seem to believe that excess begins just above their own hardly modest level of pay.

No government, in a market economy, can or should be in the business of regulating pay. And there should be no problem with high levels of rewards per se: no one kicks up a fuss about the big money paid to pop stars, footballers or opera singers. Nevertheless, the Chancellor, Sir Owen Green et al have a point.

Managers are leaders of teams, and they divorce themselves from the rest of their team at their peril. Excessively high rewards for one person can de-motivate others. The mechanisms for deciding top pay are biased: remuneration committees compute an average level for a job, and then say that they must pay Bob Bauman or Greg Hutchings far more because the company wants better than the average. Then the average goes up, and the exercise starts again.

Academic research shows no relationship between pay and performance. It would be better to pay basic salaries, plus a top-up clearly performance-related that could be justified to shareholders, and cause less resentment among other employees.

In quoted companies, the obvious solution is to issue options whose exercise price moves up and down with the market sector average. Only if the company outperforms would the executive gain.

The Chancellor should remove the existing capital gains tax postponement on exercising share options unless a scheme meets an acceptable minimum standard.