High CEO Pay Creates Its Own Leadership Shortage

Last Updated Apr 13, 2010 5:56 AM EDT

Business has been scolded by government and warned by its own lobby group, but executive pay rises relentlessly. The fall-out could be a self-inflicted dearth of business leaders that pushes up pay even further.

Bart Becht's £93m package from Reckitt Benckiser takes remuneration to a new level that will be copied by companies far less successful than the household-goods manufacturer.

Any idea of boardroom restraint seems to have been abandoned. Basic pay is boosted by bonuses, inflated by pension contributions and multiplied by share options.

Frank Chapman, BG's chief executive, received £28m last year, Mick Davis of mining group Xstrata got £27m; pharmaceutical companies AstraZeneca and Shire have long-term option plans that could put their chief executives in the big league. Massive pay-outs like Becht's may reflect the exercise of options granted over several years, but it is the big figure that upsets public and politicians.
Richard Lambert, director-general of the Confederation of British Industry has warned his corporate members to pay regard to the impression they create in the wider world, telling them that if they act as though they are from a different galaxy they will be treated as aliens.

Yet on pay packets of that size, executives can afford to live on different planets, cocooned from the critics.

Even the CBI must concede that the market in chief executives is determined by demand and supply. However, Reckitt-style rewards are distorting the supply side of that equation by making executives so well-off by their 50s that they can afford to end their executive careers early, so reducing the pool of potential leaders.

The reduced supply thus pushes up pay for the remaining candidates.

As Lambert points out, for the first time managers can make the sort of sums previously received only by owners. But while owners frequently remain with their firms to make them bigger still, managers take their money and move on or move out. It is rare now for managers to remain with one company for most of their careers, becoming inextricably linked with that business and staying with that firm beyond middle age - rightly or wrongly. Now CEOs frequently think they should move on after five years.

Becht has earned his keep at Reckitt, doubling sales and quadrupling profits during his tenure. But the scale of his reward will encourage remuneration committees at less successful companies to pay inflated rates to executives who deliver less stellar performance. It is such pay that encourages the public sector to seek to match the levels of the corporate sector.

It is unlikely Reckitt's customers will buy less Mr Sheen or Cillit Bang in protest at its boss's pay and unlikely any government will directly punish companies that pay excessively -- the penalty is more likely to be impositions on all business through higher taxes or greater bureaucracy. But where are the shareholders who should be demanding restraint?

Earning their own seven-figure bonuses if they work for fund managers such as Standard Life, the Prudential or F&C. With no sanctions, why should companies hold back?

(Pic: antonfomkin cc2.0)