SOARING EXECUTIVE pay is high on the European political agenda: the French denounce 'perfectly scandalous' rewards for executives in underperforming firms and brandish the threat of action at European level, the German Social Democrats are pushing for legislation to curb excess, the Luxembourg Prime Minister calls runaway executive pay a 'scourge' and even the pragmatic Dutch are considering legislation that would step up taxes on executive windfalls and pension contributions.
And the UK? Trust New Labour to head off anything that would make capitalism less safe for the extremely wealthy. 'We will resist calls that have been made for direct regulation of executive pay,' the Treasury minister soothed an audience of bankers last week. 'Of course remuneration packages should be strongly linked to effective performance, and incentives should be aligned with the long-term interest of the business and shareholders. But I'm clear that executive pay is a matter for boards and shareholders, not for governments.'
No comment, then, on the HSBC pay scheme that could see its top six executives taking home a total of pounds 120m - 12 times their annual salary - over the next three years nor to the barely credible news that despite the financial carnage of the past few months, the City paid out a record pounds 12.6bn in bonuses for the first quarter of 2008.
This, be it emphasised, from organisations that were founder members of the 'Gadarene sub-prime club' described by Robert Heller here two weeks ago, HSBC having had to earmark pounds 5.3bn to cover bad loans, while the bills for the rest of them are unknown but almost certainly still climbing.
Such insensitivity in the middle of a credit crunch for which these institutions bear partial responsibility could only be perpetrated by people as remote from the concerns of their customers and employees, not to mention the larger society, as the man in the moon. The isolation effect is, of course, one reason why huge pay differentials are so invidious, and why they cause such offence in the rest of Europe.
It's worth reminding ourselves of the assumptions embedded in such largesse, here taken for granted, to which other cultures object. Consider the notion, implicit in the HSBC differentials, that each of these privileged executives is at least 100 times more important than their minions on average pay. This seems less than self-evident to continental observers, who point out that not only is there no evidence of correlation between high pay for top individuals and superior corporate performance, but a striking number of corporate outperformers, even in the Anglo-Saxon world, pay their high flyers conspicuously modestly - John Lewis, Whole Food Markets (the most productive US retailer), Southwest Airlines, Amazon and Japanese Toyota. This may be no coincidence, since there is evidence that where work settings require even modest interdependence and co-operation, companies with the widest pay differentials do worse than more egalitarian rivals.
Or take the assumption that 'alignment' of top executives with shareholder interests through large bonuses is necessary and desirable. For non-market fundamentalists, that is the problem, not the solution. Today's credit crunch is at least in part attributable to the crazy incentivisation of Wall Street's and the City's finest, without regard to the wider interest. After all, it wasn't ordinary HSBC employees who blew pounds 7.5bn on the company's floundering US sub-prime arm, or devised the derivative depth charges that are blowing holes in the financial sector all over the world.
More generally, those outside our system can see that sky-high salaries are a direct consequence of the doctrine of shareholder value, which requires a small group of identifiable individuals to be held responsible for the performance of the whole enterprise, heaped with incentives and given carte blanche to do anything that shifts the share price fast - never mind that it is a travesty of how companies really work.
Hence the grotesque two-tiered management edifice that has grown up in Anglo-American companies over the past 20 years, in which the menial work of operations - producing, dealing with employees, suppliers and customers - is almost entirely divorced from that of those on the top floor, whose activities are to do with financial engineering, masterminding deals and issuing performance standards for everyone else to enable the company to fulfil the promises made to the capital markets.
In this light, even if some political capital is being harvested, continental scepticism about the boardroom pay hijack is both understandable and logical. As for us, having made a considered and decent intervention to temper the excesses of low pay, an equivalent at the other end of the scale is now urgently needed. A High Pay Commission, anyone?
The Observer, 15 June 2008