The Independent View: Public support action on excessive pay gap

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.

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6 Comments

  • The solution is quite simple :- Make everybody’s P60 available on-line. This would very quickly make businesses control exec pay!

  • Andrew Duffield 9th Jun '11 - 5:24pm

    What a load of illiberal tosh.

    Income levels ain’t the issue – it’s the wealth gap we should be tackling. If government pulled its finger out of the privileged arses of asset rich corporations and individuals, and collected privately appropriated economic rent in lieu of taxing labour, the surplus that funds so-called ‘excessive pay’ – and bonuses – would fall, with top pay reducing accordingly. The economic rent taken by banks as a result of interest charged on government-gifted credit creation is a classic case in point.

    ‘Bout time we looked at the underlying causes of inequity, rather than the superficial froth of pay and bonuses.

  • Simon McGrath 11th Jun '11 - 6:53am

    An intersting article and some of the points should be of interest to shareholders.

    But no explanation of why Liberal Democrats should have a view on the level of executive pay. we need to ensure that it is taxed properly of course but apart from that why do we care?

  • David Evans 12th Jun '11 - 7:43am

    @Simon,

    Quite simply because it puts people at the top of the tree so far away from the rest of us that they can in fact totally insulate themselves from the consequences of their actions. Hence their actions become more illiberal in almost every way. Specific points I would make are :-

    “we seek to balance the fundamental values of liberty, equality and community” – the liberty of remuneration committees, mainly made up of directors of other companies, is massively impinging on equality and community, by paying excessively to those at the top who then have no connection with the wider community and hence, for example, when a catastrophe happens (environmental degradation, banking crisis or whatever) they can simply move away. – or threaten to in the case of banks.

    “We champion the freedom, dignity and well-being of individuals, we acknowledge and respect their right to freedom of conscience and their right to develop their talents to the full.” People outside the select few have next to no chance of becoming a company director, although many have the talent to, mainly because they don’t know the right sort of people.

    “We aim to disperse power, to foster diversity and to nurture creativity.” Power is so concentrated in the hands of company directors, diversity suffers just look at how all the banks went down the same route in the last 20 years, even dragging building societies with them because of their monopolistic power.

    “We believe that the role of the state is to enable all citizens to attain these ideals, to contribute fully to their communities and to take part in the decisions which affect their lives.” Need I say more.

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