This is a difficult one. No doubt the vast majority of people cannot understand how any person’s work can be worth millions per annum in salary and bonuses. They seem to accept that pop singers, movie stars and footballers can earn untold wealth but the world of business is a closed book to them. This has been exacerbated by the impression that the financial crisis was largely caused by such people and that their behaviour was fuelled by greed for such whopping bonuses. In this they are not wholly wrong.

But recently the pendulum seems to have swung too far and the treatment of Stephen Hester, blameless in the financial crisis and brought in by the previous Labour administration to clean up the toxic mess of Royal Bank of Scotland seems unfair. Several of the more serious newspapers have expressed their opinion that this is unreasonable and potentially dangerous. The Times wrote that we’re left with an outcome that sends all the wrong signals; that we resent those who earn big salaries, don’t care about contractual obligations and allow pay levels to be set by the court of public opinion. Why would any investor choose to base a business here? In response a good friend of mine, Peter Mitchell wrote the following letter published in The Times on Wednesday 1^st February 2012.

“Sir, Hurrah for your leader. It summarises well why Britain’s growing anti-business, anti-rewards culture will drive down economic growth, worsen unemployment and lower living standards for all. The ill-informed hysteria surrounding the Hester bonus issue depressingly reflects the widespread ignorance of what’s needed to make an economy work well. Led by politicians, most of whom lack management experience of running anything, and fuelled by media commentators mostly seeking populist headlines rather than a balanced view. Britain is suffering an outburst of hypocritical anti-business sentiment that can only worsen our economic prospects in an ever more competitive world. Our serious competitors in the East and elsewhere must be laughing all the way to their bank- which won’t be RBS.”

Like me Peter Mitchell spent his early years at Procter & Gamble and Mars. He then joined Johnson & Johnson before rising to director level roles at Guinness PLC as Group Brands Director and later Group Strategic Affairs Director, both with worldwide responsibilities. From 1994-1996 he was President of the World Federation of Advertisers. In his later portfolio career he held Non-Executive Director roles on the boards of Capital Radio PLC as Deputy Chairman; GCAP Media PLC; Adventis Group PLC as Chairman; and Vividas plc where I was Chairman and we both sat on the Remuneration Committee. He is also a former Chairman of the Marketing Society of which we are both Fellows. Thus Peter has immense worldwide experience of business and knows of what he speaks.

But we should ground our opinions in facts so what are they?

Royal Bank of Scotland was run into the ground by its directors led by Fred Goodwin who had his Gordon Brown-bestowed knighthood stripped away this week, another part of the general political witch hunt. Morally justified no doubt but again difficult to explain as anything other than a political gesture as outrageous though his behaviour was Goodwin had committed no crime. What he had done was parlay a regional bank of modest proportion into a global bank of excessive proportion. His last acquisition of ABN AMRO was according to the FSA (and confirmed by friends of mine) bought after the most meagre due diligence. The price was too much, the balance sheet extended too far and RBS reported a loss of £24.1bn, the biggest in Britain’s corporate history.

Stephen Hester was brought in to replace Goodwin as CEO under a contract drawn up by the Labour government in 2008. The contract, endorsed by the then Chancellor of the Exchequer, Alistair Darling, entitled Hester to a salary of £1.2m and a bonus up to £1.5m, neither figure particularly high by comparison with his peers. He has transformed that enormous loss into a profit of £1.2bn. He has got rid of £600bn of non-core assets and made substantial cost savings partly through cutting around 30,000 jobs.  He has already turned down one bonus and now he has had to turn down another because the hypocritical Labour party was going to pretend that this had nothing to do with them and bring forward a parliamentary debate on the affair. The Coalition government has not covered itself with glory either, both allowing this mess to develop and failing to defend and explain the work Hester has done.

In a globalised world there are many businesses that can base themselves where they like and where they feel welcome. Many businesses have already moved off shore and more are actively considering it. But this is not just about businesses and where they choose to pay their taxes. It is also about individuals and what they choose to do.

I touched on the issue of executive remuneration in my blog Life in the Boardroom 20/02/2010. I explained how executive remuneration in Britain’s top companies had increased much faster than median pay largely because of globalisation. The top companies need to benchmark their top executives’ pay against the world’s leading companies. Left wing critics question this but it's true and increasingly Britain’s top companies are no longer led by Brits, proving that there is a mobile market for top talent.

But even this is not the main point. Vince Cable is seeking to bring in new rules to increase the transparency over executive pay. But there is already huge transparency over the pay of directors of quoted companies. I have served on the boards of four publicly quoted companies. I have had my pay therefore revealed in full detail in annual reports, voted on by shareholders and of course my position on the Board is also voted on regularly by shareholders. But this does not apply to directors and senior executives of private companies or partnerships. Many of the best paid people are actually working in hedge funds, private equity or professional services partnerships like law and accountancy firms where top partners regularly pull in annual pay running into the millions. Very little of this is reported in the media because it’s too much hassle. But to find out the pay of the CEO of a FTSE 100 firm takes just a few strokes on a key board. Increasingly even more of the best people will not want the harrassment and worse of leading roles in public companies but will find greater wealth opportunities with no glare of publicity in private companies.

I started this piece by saying it’s difficult. It is. Do I believe that bankers’ bonuses have become excessive? Certainly. Do I believe that the gap between top executives’ pay and their employees has become too big? Definitely. Do I think that society would be a better place if there was more overall equality in pay? Probably. But do I believe that the current level of interference by some of the media and most of the politicians will help at all? Most certainly not. There is far greater inequality in Brazil, Russia, India and China but their politicians don’t care because their businessmen are generating growth. It is quite likely that the behaviour of our politicians and our media will prevent our businessmen from doing the same and then we will all suffer.

Copyright David C Pearson 2012 All rights reserved