The clamour for action on excessive pay is growing, not least from some of our biggest business names. Sir Stuart Rose, of Marks and Spencer, recently suggested that the gap between CEO pay and the wages of ordinary workers might have got out of control, while the newly appointed President of the CBI, Sir Roger Carr, this week described ‘rewards for failure’ as “unforgivable”.
Yet the idea that very high salaries can be justified as long as they are deserved is called into question by research from the High Pay Commission, which found that executive pay has grown by 7 per cent a year in real terms over the last 10 years, compared to annual average real growth of just 0.8 per cent between 1949 and 1979. Researchers can find no evidence that UK firms have done better over the last 10 years than in the 1950s, 60s and 70s. Nor is there any evidence that senior executives are significantly more mobile than ordinary workers or modern firms more complex to run, as many supporters of the rapid increase in top pay argue.
More likely is that the growth of ‘performance-related pay’ has taken the lid off top pay and made deals increasingly complex, so that boards find it harder to hold executives to account. The result is that top earners are taking an increasing share of the pay pie: in 1975, 22 per cent of the UK wage bill was paid to the top 10 per cent of earners but this had risen to 32 per cent by 2008. The top one per cent did particularly well, more than doubling their share of the total wage bill from 5 to 11 per cent over the same period.
But the problem isn’t just at the top. Across the earnings ladder, the relationship between what we put in and what we get out is often murky. Bonuses provide a good example: in many companies, sizeable incentive-based payments are available to a small group of top earners, while ordinary workers often see no extra reward when their organisation does well – so their contribution to a firm’s success is effectively dismissed. Even in companies that run share schemes for all staff, the rewards available to the average employee are often minimal.
One reason that top earners are able to seize an ever growing share of the wages pie is that the collective power of ordinary workers has diminished. Union membership has halved since the late 1970s and the rise of sub-contracting has segregated high and low paying jobs into different companies. As a result, employees have much less power to negotiate their own salaries or to influence pay structures in their workplaces, including executive pay deals. In larger organisations, employees often feel disconnected from the senior team, having little idea what they do, how their pay is determined or the extent to which it is really deserved.
New polling by IPPR shows that two thirds of working people think the pay gap in their own workplace is too large and 78 per cent would support government action to reduce the gap between high and low earners. This isn’t about capping top pay or simply raising the minimum wage. Instead, government, business, unions and civil society must look at the underlying power imbalances that allow top earners to take a growing share of the pay pie and shut ordinary workers out of the decision-making process. This requires new institutions capable of promoting the interests of the majority of workers and giving them more say in the workplace. Not an easy task, but a vital one if we are to ensure many millions of employees get a fairer share of the pay bill.
Kayte Lawton is Senior Research Fellow at the Institute for Public Policy Research www.ippr.org.