Nine chief executives, including Diageo's Paul Welsh and Centrica's Sam Laidlaw sit on the pay committees of FTSE firms

This article is more than 8 years old

This article is more than 8 years old

Executive pay has spiralled out of control because nearly half of remuneration committee members are either serving or former company bosses, according to a report by the High Pay Centre.

Nine current FTSE 100 chief executives, including Smith Group's Philip Bowman, Kingfisher's Ian Cheshire, Diageo's Paul Welsh and Centrica's Sam Laidlaw sit on the remuneration committees of fellow blue chip companies.

The committees, which set chief executives' pay, succumb to "group-think" because they are dominated by a "closed shop" of highly paid current and former directors who benefit personally from rising pay levels, the campaign group said.

The average pay of a FTSE 100 boss now stands at £4.2m, according the employment research group IDS. On Friday, it emerged that the former Reckitt Benckiser chief executive Bart Becht, who stepped down in September, had been paid £12.1m last year in cash and shares. The company behind Cillit Bang and Vanish paid him cash and shares worth £203m in six years, and he could still be in line for staggered payouts worth £45m in future years.

Over 46% of people sitting on pay committees are or have been lead company executives, according to the centre's research, which is published on Monday.

"Through the common process of benchmarking, current executives may have an indirect financial interest in increasing pay in other companies," the report states.

Laidlaw, whose package at Centrica was worth a potential £4.3m last year, sits on the HSBC Holdings' remuneration committee. Walsh, who was paid £4.4m by Diageo and has amassed a £13.4m pension pot over a decade in the post, sits on the Unilever remuneration committee. Cheshire, whose last published package was worth £4.2m, sits on the board of the pubs group Whitbread.

Some 33% of FTSE 100 companies have a current company chief executive or executive chairman on their pay committees. The vast majority come either from business or financial intermediation such as banking and investment.

Of the 366 non-executive directors who sit on pay committees, only 37 – or 10% – are not from these professions. The centre found two from the BBC, 20 who were from the civil service or politics, three lawyers, seven accountants, four academics and one film producer.

The committees are also male dominated. In the 96 FTSE 100 companies surveyed by the centre, 45% have all male committees, while there are just 59 women – 16% of the total – sitting on pay committees at blue chip companies.

Most boards seek to pay above the median average, the report says, and increasingly make awards in the upper quartile of the pay scale for performance-related awards. This results in wage inflation.

"It takes a very brave remuneration committee to seek to pay its executives below the median," the report states. "It is seen as the equivalent of admitting they are mediocre or not up to the job."

At Barclays, chief executive Bob Diamond is in line for a £17m payday, and the bank is proposing to pay his £5.7m tax bill incurred when he relocated from the US to the UK to run the company last year.

The business secretary, Vince Cable, is hoping to use shareholder votes to reign in spiralling pay. A consultative paper suggests a number of reforms, including making a vote on a firm's future pay policy binding, with at least 75% of shareholders required to give their approval, and a binding vote when directors who leave collect more than a year's salary.

Cable also wants listed firms to publish a single figure for an executive's total remuneration each year, and to clearly illustrate how awards relate to performance.

Fund manager Fidelity says boards should be required to secure shareholder approval for "annual variable compensation" - bonuses and incentive plans – before payment. Resolutions failing to win 75% approval would have to be redrafted and put to a new vote.

• This article was amended on 2 April 2012. The High Pay Commission is now known as the High Pay Centre