Pay must be accountable, even for the chauffeur-driven

When it comes to pay, non-executive directors on company boards have split personalities. The hard part of their brains applies itself to their company's annual budget and in particular to the wages bill. But when it comes to the rewards of executive directors, however, the soft side is switched on. It was pliable grey matter which approved the £10m bonus for Chris Gent, the very talented chief executive of Vodafone, about which shareholders made a fuss at their annual meeting last Thursday.

When it comes to pay, non-executive directors on company boards have split personalities. The hard part of their brains applies itself to their company's annual budget and in particular to the wages bill. But when it comes to the rewards of executive directors, however, the soft side is switched on. It was pliable grey matter which approved the £10m bonus for Chris Gent, the very talented chief executive of Vodafone, about which shareholders made a fuss at their annual meeting last Thursday.

Here we are in the midst of a deflationary age, with price cuts prevalent on the high street, with redundancy an ever-present threat for most people in work and with pay rates rising by no more than three to four percentage points each year. Yet chief executive rewards, along with the salaries of star footballers and London house prices, seems to be one of the few commodities free to rise without limit.

So far as chief executives are concerned, the reasons are paradoxical. The very institutional shareholders which kicked up such a fuss in the case of Vodafone are partly responsible for the phenomenon in the first place. They have insisted that a company's stockmarket valuation is the supreme test of its success. And because non-executive directors can easily persuade themselves that a particular chief executive can make a big difference to the valuation, they begin to tell themselves - wrongly - that it doesn't matter what they pay to attract and retain a management star.

As a result of failing to think hard about Mr Gent's salary, the non-executive directors of the company were unable to give a coherent account of why they had acted as they had. Vodafone's chairman, Lord MacLaurin (he was put into the House of Lords, presumably, for his services to executive pay) told shareholders at one point that the group's executive directors had "worked through weekends and holidays to the detriment of family life" and should be "properly rewarded". He obviously doesn't realise that many people, from senior to junior, in all sorts of occupations, work long hours and suffer the same inroads into their holidays. Lord MacLaurin's naïvety, I should think, is the result of too many years of chauffeur-driven cars, diary secretaries and bothersome details always being taken care of by somebody else. Like many senior executives of large companies, he has become distanced from everyday life.

Originally the company described the £10m bonus as "due reward for the success of acquisitions". This was not particularly clever either. As a principle it encourages executives to engage in gigantism, making take-overs to gain extra salary. The chairman put the point in different language at the meeting - now the bonus was to be seen as a catch-up because existing rates of pay did not reflect the increased size of the company.

In my experience, non-executive directors are altogether too timid in dealing with the pay of the chief executive. If the person concerned proposes a substantial improvement, non-execs can easily become dismayed by the feeling that if they refuse, then they will have sent an unduly negative message. So they hesitate - and generally give way.

To buttress non-executive directors, successive government have wondered whether company law should be changed. At present there is no direct means for shareholders to approve, or otherwise, the pay of board members. And while the pay of directors is disclosed in broad terms in company accounts, details of bonus schemes are often partially hidden from view.

The reforms I should like to see are simple. In the first place, the salary of individual directors and the details of any incentive arrangements should be fully disclosed in the company's accounts. This should be made a statutory requirement. Second, the non-executive members of the board should write a report to shareholders, published with the annual accounts, explaining any changes in directors' remuneration and making whatever comments they think appropriate on the considerations they have taken or will take into account. Third, at annual general meetings, shareholders should be asked to approve the report on directors pay before going on to consider whether or not to approve the accounts as a whole.

As a result, the issues could be rationally discussed. Non-executives directors could say to prima donna-like chief executive - "look, we have to publish a statement about your pay, what can we say that makes sense and will be accepted"? Over time some sort of consensus would emerge both within companies and more widely. Rarely, if ever, would shareholders want to show their displeasure by ambushing the board at the annual meeting, which is what happened to Vodafone.

aws@globalnet.co.uk