Some bald statistics before the ranting begins: In 1979 the top 0.1% of earners took home 1.3% of the national income; by 2007 this had grown to 6.5%. In 1979 the top 1% took home 5.93% of the national income; by 2007 this had grown to 14.5%. In 1979 the top 10% took home 28.4% of the national income; by 2007 this had grown to 40%. In 2010 alone, executive pay in FTSE 100 companies went up by an average of 49%, against a 2.7% rise amongst employees in these firms. Top bosses now take home nearly 7% of total incomes, a share that’s more-or-less doubled in just the last decade. I could go on but my rant awaits.
These statistics and many more come from the High Pay Commission’s final report [PDF], and together they paint a very stark image. Divorced from measures of corporate performance, executive remuneration across all sectors of the economy has risen exponentially and now poses a clear and present danger to the stability of our political economy – that’s the salient lesson to be learned from the Commission’s findings.
Having set out the evidence of the accelerating increase in top pay, the Commission argues that there are grounds for action on excessive pay at the very top that cover three broad areas, all of which point towards radical reform of executive remuneration.
The business case for fair pay states that company performance is dampened by reduced employee motivation resulting from unfair executive pay settlements. Independent studies verify that companies with more engaged employees perform better on a host of indicators. When added to the reduced trust that the public places in business (the Commission reports this as falling) and the harm to particular companies’ reputation, there is a real case for reforming pay on the basis that it would benefit companies to do so. I would point out, however, that the continued rise of top pay indicates that serious though these considerations may be for companies themselves they clearly haven’t played heavily on the minds of those who matter; the business case at the level of individual firms alone won’t be enough to curb excessive remuneration.
Hence the Commission presents a macro-level case for fair pay from the systemic perspective. They argue convincingly that soaring high executive pay discourages the entrepreneurial risk-taking that drives stable economic growth (the incentive to take capital risks is lower when money’s easier to come by in corporate boardrooms), as well as introducing greater economic instability and ‘sectoral imbalance’ within an economy by skewing rewards towards particular avenues. When juxtaposed with the stagnation of wages for the vast majority – detailed in a report also published this week by Professor Kenworthy for the Resolution Foundation – sky-high pay at the top prevents most people from benefiting from the proceeds of growth and from participating fairly in the market economy. The economy’s foundations are weakened when incomes are concentrated at the top.
Finally the Commission sets out the social case for fair pay, followed by 12 recommendations as to how to make pay at the top fairer. I’ll return to the former after discussing the latter – what should government and business do to make top pay fairer?
The 12 recommendations aim to improve transparency, accountability and fairness with regards executive pay – and expressly do not aim to set arbitrary limits to remuneration by State diktat, something worth emphasising. They seek to make top pay more transparent through standardised reporting of executive pay, and the simplification of executive pay packages to allow better public scrutiny. They seek to increase accountability on top pay, giving employees and shareholders a greater voice in how executive remuneration is set, as well as making non-executive appointments to boards less of a closed-shop. Finally, the Commission calls for publicly listed companies to produce fair pay reports along the lines of those recommended by Will Hutton in his public sector fair pay review, as well as the institution of an official High Pay Commission to monitor trends and enforce sectoral agreements in high pay.
Critics of the Commission’s approach will argue that these measures are unnecessary – that the debate over high pay is either a distraction from the more pressing matter of raising the fortunes of those at the bottom of the pay scale, or worse still an attempt by the Statist left to exploit the politics of envy and deny the deserving rich their due rewards. To refute these claims, let’s return to the social case for fair pay.
For me, excess executive pay is a marker of the inequality of arms that underlies it, a symptom of the imbalance between the interests of the few at the top of a company and those who work within it. When executives appropriate bigger and bigger shares of a company’s turnover as pay for themselves, it indicates their growing alienation from the rest of their co-workers – and hence from society as a whole. Such alienation is a key driver of psychosocial stress and is a way for those lucky enough to have made it to the top of capturing the means for others to do so; there’s a great deal of evidence that inequality of income reflects underlying inequalities of power and responsibility, that the payment of barely-credible pay packages stems from the immunity from scrutiny that great power without accountability brings.
With excessive pay and power comes the ability to alter the rules of the game in favour of the rich – meaning that far from being a distraction from solving abject pay and conditions for many at the bottom, soaring high pay actively harms our attempts to do so by allowing a rich minority to dominate the debate. In truth it’s talk of ‘bashing job creators’ (leaving aside record levels of unemployment) and the like that’s the distraction as it misses the point – concentrations of pay reflects the trickle-up concentration of power that prevents the creation of a fair economy that we should focus on.
It pains me to have to state this so plainly, but I am a liberal. I believe in social arrangements that make more people free to achieve the aims and ends that they have reason to value, and as such I am suspicious of the concentration of power in the hands of a few at the expense of the many. It is because I am a liberal that I won’t tolerate the accumulation of unjust remuneration in the hands of a tiny minority of executives whilst millions see their livelihoods ruined. It’s my liberalism, social liberalism if you like, that convinces me that true prosperity is co-produced by labour, management, finance and the State, not just the so-called talent of the richest 0.1%. It’s because I’m a liberal that I find it heartening to see Vince Cable taking this report seriously, and this Lib Dem for one won’t rest until we see fairer pay in public and private sectors based on the principles of due desert for discretionary effort.
For more on the Liberal Democrat reaction to the High Pay Commission, see Stephen’s post from earlier.
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9 Comments
I am a great believer in sealed bids for top jobs. The mistake Board members (and other employers of high level administrators) is to think they have selected just the one right person. If at the time of application the applicant had to fill in his required income and any annual changes to that income necessary over the term of the contract, I think we would see a downward pressure on ‘top pay’.
For instance in local government I have never met a Chief Executive who would not do the job (before he – yes he’s got it) for a fraction of what the job was advertised at. In fact most people applying for the post would do it for virtually nothing because at that stage in their career they get most satisfaction out of the status, rather than the money and pension hike. No, I don’t believe that they would just stay as Deputy This or Execitive Director for that … do you?
The one senior officer who I met who left to join the private sector was seconded back by that private sector firm to a public sector quango within 6 weeks – yes he was found out in double quick time. A year later another local authrotiy employed him as – guess what? – a Chief Executive.
To any leaders of the Council out there, just try it. Oh and don’t waste your time of executive search – they all know what jobs are coming up. If you need skilled help in selection, do that after the deal-line for applications and when you know just how much the applicant is really prepared to do the job for.
Frankly, a lot would pay to have the job. Now, there’s a saving.
The figures from the HPC are pretty shocking. I’m sort of cringing already in expectation of a tsunami of something-must-be-done-ism that wants to abolish the whole private sector, but it’s clear we do need legislative change to deal with this.
We need some carrots as well as sticks – could the state give some kind of regulatory relief or free advertising to any company that operates within a certain median:top pay ratio, doesn’t avoid tax and includes workers on remuneration committees?
Excellent article Prateek.
I especially agree with the end section.
Liberals need to wake up to the fact that concentrations of wealth equal concentrations of power… which has a corrosive impact on democracy.
The ability to hire lobbyists, fund political parties, individual candidates, think tanks, pressure groups, legal teams, journalists, press officers and PR people, private investigators… all things available to those with money, but largely unavailable to those without.
Community appropriation of privately earned income should be anathema to Liberals – and Liberal Democrats for that matter. In a Liberal society, earned income, however packaged, should only ever be the concern of the board members / shareholders and private individuals concerned. Taxing earned income at any level is little more than state-sanctioned theft, the cost of which is ultimately passed on to the poorest in the price of goods and services.
Private appropriation of community created wealth (unearned income) should be our overriding concern – as it once was! Government’s continuing promotion of – and provision for – the private plunder of public value at the taxed expense of productivity, enterprise and trade is an abject, amoral disgrace.
Obscenely high earnings are merely a symptom of this fundamental underlying cause and our shameful inability – as Liberals – to not just address the basic and continuing problem, but to even recognise it apparently.
there’s plenty of good stuff in the Report which will held improve the workings of the market for senior managers. But I see little evidence that the changes will work to reduce pay. Increased transparency has in the past worked to increase pay as it gives people more information to bargain with. Nor is it clear why publishing ratios or having an employee representative on the Remco will reduce pay as they will be faced with exactly the same issues as current remco’s – how to persuade the most competent people you can find to work for you( and yes of course sometimes firms get it wrong).
The report makes no attempt to investigate the reasons why pay has gone up so much. One area they might have looked at is the increasing pressure over the last 30 from institutional shareholders on their fund managers to improve their return which in turn leads to grEater pressure on boards who in turn want to hire managers who they think will improve results.
The other area which is very odd is that they want to reduce the link between pay and performance. Given that a lot of the concern is over the (alleged)lack of such a link this seems peculiar.
I would have had far stronger controls on outside consultants to Remco’s – they should simply only work for the Remco and not for the Company.
It looks like the Coalition will adopt many of the recommendations ( I suspect not reducing the pay/performance link). I would be surprised if it has the effects that the Commission expects.
It is a pity the Commission did not include anyone who has actually been on a Remco
Transparency is morally commendable but don’t imagine it will result in anything more than a race to the top, as chief execs suddenly start feeling hard done by compared to others.
I’m afraid the report is a typical report by nice people who consider the provision of information and administration as a substitute for action. All in all a total waste of space. Nothing of substance will change. Directors pay will continue to rise in an uncontrolled and unaccountable manner and the divisions in our society will widen to catastrophic proportions.
@Bill: an advantage of sealed bid job applications would presumably be the end to the spectre of those looking for highly-paid jobs playing current employer off against future – with the planned increase in transparency this would presumably become more important. Interesting idea, worth pursuing.
@Ed: the idea has been floated of a Fair Pay kitemark, akin to the Fairtrade scheme – it would be particularly useful if, for instance, public bodies committed to procure services from Fair Pay employers. We would have to be careful though as such kitemarks, ratios and institutional arrangements will need to vary from firm to firm and sector to sector.
@Peter: aww shucks, thanks! The fact is that Liberals should see the accumulation of extremes of income and wealth as a symptom of the concentration of power without accountability – power to set the rules of the game using the things you listed – and that is what we should stand full square against.
@Andrew Duffield: ^^ what I said above to Peter ^^ In addition to which I’d say: the notion that all income, however obtained, is by definition earned, and therefore of no concern to those outside the contractual agreement, is just absurd – not least when parties to the contract such as shareholders have little or no effective power to adjust the terms. I’d be happy to leave pay to boards and shareholders, if the former were fairly constituted and the latter empowered to play their true role.
Oh and by the way, why the talk of taxation as theft? That is frankly unhelpful. In fact, why the talk of taxation at all? If you read the report you’ll note that the proposals in now way rely on the ever-increasing marginal taxation of so-called earned income, they don’t amount to ‘soak the rich’ – in fact they attempt to tackle the very underlying causes of high pay you mention. Sorry but you’re just way off the mark here.
@Simon as I said above, transparency on its own is not likely to be enough, nor is tokenistic employee representation on Remco – what’s needed is a wholesale and radical realignment of the incentives and interests of management, labour, investors and wider stakeholders. In other words, a re-shaping of company structure – the commission’s recommendations to date are a good start but they’re just that, a start. Oh, and before I hear howls of derision from those who claim that realigning company structures is authoritarian meddling, may I remind you that companies trade under terms and a framework set by society, they are structured according to norms and laws already, so all I’m calling for is an adjustment in those terms and that framework to make power and hence pay in the workplace fairer.
@Ann Keelan: there is already transparency to some extent so what we’re calling for is better transparency (i.e. standardised reporting of remuneration such that everyone can understand), used crucially in conjunction with the empowerment of workers and shareholders to hold execs to account and make pay fairer within a given firm.
The problem is really more to do with average wages being driven down. High earnings at the top are the result of arguing that certain individuals are “wealth creators” and ignoring the reality that the people working for them are also creating wealth. Simply limiting how much these people earn would do very little good. A consumer society actually relies on high average wages, thus more available spare cash. The borrowing boom was phony wealth .When the loans were recalled it turned out that the money was not there, It sometimes seems that some of the top 1% are paying themselves ever increasing salaries precisely because they are failing.. They’re not turning a profit so they are accumulatting as much loot as possible before things sink further. It’s like a variation of the time honoured practice of sneeking out of the backdoor with as much as you can carry to avoid ones creditors.