Don't Blame the best paid1%......they are worth it.

Don’t blame the best-paid 1 per cent – they’re worth it
It may be hard to stomach, but the wealthy have never forked out more and the lower-paid half of the populace have never had to pay a smaller share of income tax

JK Rowling: today’s stars from the world of business, literature and sport are able to leverage their brand on a global scale Photo: Reuters
By Fraser Nelson
8:27PM BST 25 Jul 2013
198 Comments
The Arab Spring is not the only revolution that has failed in recent years. The so-called “shareholder spring”, billed as a revolt against high directors’ pay, is starting to look like an Egyptian experiment in democracy. The head of Nationwide this week easily saw off protests about his £2.3 million package, while Burberry’s Angela Ahrendts drew more admiration than outrage when she emerged as Britain’s best-paid boss, with £16 million. The company reports that are published this summer will reveal that chief executive pay rises are back – as the gap between the best-rewarded 1 per cent and the rest grows wider than ever.

If this were just an issue of plunder and greed, then it could easily have been stopped. David Cameron could have quashed it with his recent inquiry into high pay. Salaries could be brought back closer to earth, with a few knighthoods loudly revoked along the way. But the shareholder revolution failed because it ran up against a simple and depressing fact: by and large, the much-maligned 1 per cent are, actually, worth it. We may hate the fact, but they do – on the whole – seem to generate even more money than they’re paid.

Take J K Rowling, a writer with so much to offer that she struggles to confine herself to one pen name. Now that her second, Robert Galbraith, has been identified, sales of the book are soaring and she will make a second (or 22nd) fortune. She is already far richer than, say, John Buchan – who was more prolific and had an indisputably greater talent but worked in a different age. Today’s stars – from the world of business, literature and sport – are able to leverage their brand on a global scale. If Ms Rowling’s books are read as voraciously in Tokyo as they are in Telford, then the money will follow.

The same rules apply to architects, lawyers, computer programmers – and, yes, financiers. The trend has been underway for decades, but politicians have shown little interest. Tony Blair said he had no burning ambition “to make sure that David Beckham earns less money”, which summed up the national mood until the crash. Then the idea that bankers’ emoluments and bonuses started the crisis took root. A Left-wing campaign group calling itself the High Pay Commission emerged and Mr Cameron felt compelled to act. This ended in greater transparency – but it has not dented the growth of sky-high pay. And that is because it is, depressingly, justifiable.

A recent study by Harvard’s Greg Mankiw into the “1 per cent” concluded that their pay is the result of global forces – the difference a good (or bad) chief executive can make is far greater nowadays because the companies are so much bigger. Their rewards have risen accordingly. Or, as he put it, “most of the very wealthy got that way by making substantial economic contributions, not by gaming the system or taking advantage of some market failure”. This is true for every endeavour, from sports stars to mining magnates. If a banking chief executive books a table at Scott’s of Mayfair, he can look around and see an advertising millionaire playfully throttling a millionare chef. And if he opens the Sunday Times Rich List, he’ll find bankers in a lonely minority.

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It is also impossible to blame exorbitant salaries on remuneration committees whose directors have become too cosy with the bosses they’re supposed to be regulating. There are, of course, anomalies – and shareholders are more likely to complain now, the most powerful doing so behind the scenes. But those who run publicly quoted companies (the ones who have to disclose who is paid what) are, if anything, paid less than those who run private firms where decision-makers are spending their own money. Recent studies show that when a company is taken off the stock market by a private buyer, the remuneration of the boss tends to jump sharply.

Take Mark Frissora, who runs the Hertz Corporation. When he was recruited, reports said that the private investors who hired him offered a salary that public (and, therefore, ultra-scrutinised) companies could not compete with. So was he worth his $33 million? The private investors who floated a car rental firm for $4.8 billion under his leadership seemed to think so. They were selling not just a company, but a star boss. As they knew, the price investors will pay for a good CEO is absolutely huge – because the difference a strong leader makes is, now, huge.

Quietly, Mr Cameron has started to stick up for the high-paid. He says, when asked, that some people are worth millions of pounds a year because they’ve added masses of investment and masses of growth. “The fuss over pay has died down now,” a minister tells me. “We’re not going to revive it.” Even George Osborne has felt able to vote against the EU cap on bankers’ bonuses: it was a hopeless vote, at 26-1, but he made his point. He has tried limiting extra cash rewards for the people who run the banks he owns, with dismal results. If a banker could be found to make RBS so successful that it could be sold at a £20 billion profit for the taxpayer, would they be begrudged, say, a £20 million pay-packet?

Even if such a miracle-worker was found, no one could argue that they are a thousand times as smart, or put in a thousand times as much effort, as a teacher on £20,000 a year. But salaries are not a measure of anyone’s intrinsic value. The only relevant factor is productivity, whether they’ll be worth it. The same is true for payoffs, the most sickening aspect of high pay. Had Fred Goodwin’s mania at RBS been spotted earlier and he had been paid £2 million to go quietly, it would have been money well spent – it might have stopped him sinking the company. Morally, there is no defence for golden parachutes. Financially, they can be worth every penny. It doesn’t take a socialist to be deeply uncomfortable about one man being paid a thousand times more than another. But every inquiry into high salaries hits the same buffer: in a free country, there is not much you can do about how people choose to reward each other. It is hard to argue that high pay hurts society. It may push up the cost of products, by a minuscule amount. But managerial incompetence puts those prices up – and wages down – far more than managerial greed. The rich may be deeply annoying, but they’re scarcely a social menace, given that the most well-off 1 per cent pay almost a third of income tax collected.

In his seminal 1931 book, Equality, R H Tawney lamented that the public did not seem resentful of the rich so much as fascinated by their goings-on. Little has changed. For most Brits, stupendous wealth has always been something that is aspired to more than resented. The post-crash fuss about the 1 per cent often seemed to be a civil dispute between its members: well-heeled activists, journalists and union chiefs castigating those who nabbed the best tables in restaurants or pushed up prices of Tuscan villas. And as successive prime ministers have realised, no government anywhere has helped the low-paid by railing against high wages.

The rich, to adapt Jesus in St Matthew’s Gospel, will always be with us; the 1 per cent are likely to pull ever further away. But this has its compensations. The lower-paid half of the British populace have never had to pay a smaller share of income tax than today, because the wealthy have never forked out more. And while there is not much David Cameron can do about the rich, there still plenty he can do about the poor. He doesn’t shout about it. But he has rightly concluded that this is where his attention is best focused.

Fraser Nelson is editor of 'The Spectator’