HEADLINES ABOUT soaring directors’ pay have become so regular that we are suffering what might be called fat-cat fatigue. Even so, the news in the 2006 Directors’ Pay Report from Incomes Data Services that average total pay for chief executives of FTSE 100 companies shot up by more than 40 per cent this year should raise more than eyebrows.

For comparison, the IDS pay databank shows wage settlements for the year running at 3 per cent. Chief executives in the biggest UK companies now earn 98 times more than the average of all full-time UK employees: pounds 2.9m, up from pounds 2m a year ago. Last year’s CEO pay increase alone was 31 times greater than the average full-time wage.

A longer-term perspective shows the divergence is not only growing but speeding up. In 1983, according to figures produced by researchers at the Centre for Research in Socio-Cultural Change (CRESC) the ratio of CEO pay to the average was nine to one. (The figures can be found in Financialisation and Strategy , Julie Froud et al, Routledge.) By 2000, with real CEO pay growing at a steady 25 per cent a year, year in, year out, it had reached 39 to one. To paraphrase the US senator: ‘A million here, a million there, and pretty soon you’re talking about real money.’

What justification is there for the growth of such extreme disparities? None of the usual explanations holds water. Market forces? As the Work Foundation and others have demonstrated, the idea that there is a global market for CEOs that impartially sets their rates is a myth. What there is is a ‘going rate’, diligently attached by remuneration committees and consultants to US figures, which tows the total ever up. Today’s going rate has doubled in the past five years. Not so much a market, then soaraway executive pay is more a case of market failure.

Could it be a reward for running risk? The Work Foundation has taken a pop at this one, too. In The Risk Myth , published last week, Nick Isles shows that last year turnover of FTSE 100 chief executives stood at 14 per cent compared with 18.3 per cent for the economy as a whole and 23 per cent for the private sector. One CEO in the period was declared redundant, but he picked up pounds 5m in compensation. That’s the kind of risk many people would be happy to run.

Even when a CEO does get the sack, he (typically a he) will have seen his pay double twice over his seven years in the job. Meanwhile, there is good evidence that those with lower status and less control over their jobs suffer more ill health and die earlier – so relatively less risk for CEOs there, too.

So could it be that the incentives motivate CEOs to make a huge difference to their companies? Nope. The CRESC researchers found that, for all the performance waffle, FTSE 100 firms are basically ‘GDP companies’, jogging along at 3 per cent growth a year, just like the economy. Although over time market capitalisation has grown faster, that’s overwhelmingly the result of the 1990s stock market boom and the flood of investment capital into the market – so the work of investors, not managers.

In fact, it’s now well established that today’s very high pay inequalities are harming rather than advancing company performance. In settings where people need to work together to produce results – most places – unequal rewards are felt as unfair and demoralising, and damage co-operation and teamwork. Surveying the literature in their essential Hard Facts, Dangerous Half Truths and Total Nonsense, Jeffrey Pfeffer and Robert Sutton report that in all kinds of organisations, ‘dispersed rewards have consistently negative consequences’. That goes for universities and even sports teams. One study of baseball – a game that places great emphasis on individual performance – found that players on teams with highly unequal pay performed worse, particularly the lower paid, and so did the teams as a whole. They were also less successful financially.

If sky-high pay is unfair, unjustifiable and harmful (which it is), why does the juggernaut keep on rolling? CRESC argues that top managers have just reaped the rewards of being in the right place at the right time. Despite the rhetoric, the emphasis since the 1980s on shareholder value has not actually improved returns to shareholders. What it has done is switch the focus of corporate governance from all stakeholders to shareholders alone, and more precisely to the problem of aligning the interests of managers with those of shareholders. As they see it, the answer to this problem is incentives the only question is what kind.

Ironically, however, the beneficiaries of ‘shareholder value’ are not shareholders but managers, who, with the full blessing of Uncle Tom Hampel, Cadbury, Greenbury and all, used governance reforms and the 1990s bull market to clean up. They can’t believe their luck. Perhaps Woody Allen had in mind the man in the corner office when he observed that 90 per cent of success was showing up.

The Observer, 10 December 2006