The recent international jamboree at Davos provided ample opportunity for the “great and the good,” as well as the not so great and not so good, to enjoy gourmet meals and doubtless lashings of champagne ultimately at the expense of tax-payers. The participants also had time to exchange views on current world issues.

A good deal of time was spent on the problems facing the European economy, not least the extent of youth unemployment which has reached crisis proportions. But for the British media the dominating theme was that of excessive executive pay and bonuses, especially bonuses for bankers.

The disparity between the huge sums paid to chief executives and senior directors and that of workers on the shop floor or in back offices has grown exponentially in Britain in the last decade although it is still not as great as in the United States. It has become a major cause of anger in Britain against free market capitalism.

There has been widespread fury at reports that Stephen Hester, the current chief executive of the Royal Bank of Scotland (RBS), was due to be paid this year nearly £1 million in shares on top of an annual salary of well over £1 million.

An important factor in exacerbating the financial crisis was the excessive bid made by RBS for ABN AMRO, a European bank which had vast bad debts and was on the verge of bankruptcy. RBS had to be rescued by the British government which had to inject billions of pounds into the bank. As a result some 83 percent of the bank’s shares were taken into public ownership.

Under Hester the price of RBS shares has roughly halved in the past year. RBS’ staff numbers have been cut, much to the fury of the unions, and lending has been cut to the annoyance of small business. The present position is that the government — aka the tax payer — is sitting on a huge loss. Hardly a justification for a huge bonus!

The government as the major shareholder had been urged to exercise its shareholder voting rights to stop Hester’s bonus. The government alleged that its hands were tied by the terms of the contract made with Hester by the last Labour Party government. The Labour Party opposition threatened to call a vote in the House of Commons on the issue and politicians of all parties called on Hester to relinquish his bonus. His only options were to decline his bonus or resign his post: He chose to decline his bonus.

This isn’t the end of the story. Other huge bonuses are due to be paid to senior executives responsible for investment banking in RBS and Lloyds TSB, which is over 40 percent owned by the government, to say nothing of other banks such as Barclays, which would at the very least be in a parlous state if the government had not intervened massively during the financial crisis.

Many people outside the City of London think that the bonus culture has got completely out of control, with remuneration committees consisting of “fat cats” who behave in accordance with the adage “if you scratch my back, I will scratch yours.” Why do executives need large bonuses for doing a job for which they are handsomely paid?

In the view of public opinion, chief executive officers of banks or industrial companies should not be rewarded when the shares in the companies they manage fall in value and profits decline.

Chief executives should be reasonably rewarded for leadership qualities and strategic insight, but even if they have such qualities a company’s performance depends on teamwork. The contributions of outstanding individuals can be one of the keys to success, but success cannot be achieved without the full support of every worker in the firm.

Hester’s salary is many multiples of that paid to the prime minister. Why does he deserve such sums when his responsibility, considerable though it may be, is so much less than that of David Cameron? It is important to the tax payer that he should succeed in putting the bank on a sound footing.

The government’s handling of the issue of bankers’ pay and bonuses has seemed to some akin to that of the previous Labour government, which seemed to be swayed by the popular press. The populist Daily Mail called for Fred Goodwin, the bullying chief executive regarded as responsible for the financial mess into which RBS fell, to be deprived of his knighthood which had been conferred on him by the Labour government for “services to banking.”

The government responded by arranging for a committee of civil servants to recommend to the queen, who is constitutionally bound to accept the government’s advice, to strip Goodwin of an honor that should never have been conferred on him in the first place.

The two episodes involving Hester’s bonus and Goodwin’s knighthood can be considered as populist measures. They do not solve the basic problem of how senior executives should be fairly remunerated in a free market economy.

The government wants to push the responsibility for deciding remuneration on to shareholders. In practice this means pension funds and insurance companies. The votes of small shareholders can never be made to count effectively. But the main concern of fund managers is to maintain the value of their funds invested and it is unlikely that they will ever exercise effective restraints on pay.

One alternative is government imposed controls. It is difficult to see how these could be drawn up in ways which would be seen as fair to all involved and how the controls could be effectively administered. Chief executives argue that they must be paid what the market directs. They assert in self-justification that the best people will go where the money is.

But no one is indispensable and if they resign other able people will be ready to take their places.

Job satisfaction and social conscience play an important role for those in public service. If the payment of excessive bonuses were seen as obscene, bright and able people might be readier to accept median salaries, but cynics will doubtless dismiss this as Utopian.

Hugh Cortazzi served as Britain’s ambassador to Japan from 1980-1984.

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