Opinion: Time to publish the magical ratio

A week is a long time in politics, but it also sometimes seems to move at a glacial pace.

It is now two decades since Bill Clinton won the presidency on the slogan that ‘trickle down economics’ doesn’t work. Yet even a couple of years ago, there was Labour’s Peter Mandelson being ‘relaxed’ about people getting ‘filthy rich’.

Well, finally things seem to be shifting. Even Max Hastings, of all people, writes in the Financial Times that “gross disparities seems likely sooner or later to promote an upheaval, perhaps graver now than most western societies can now envisage.”

It certainly seems to have done so in the Arab world. Yet most western governments are still flummoxed about what to do about the staggering greed of executive pay.

There is a growing understanding that allowing one small class of ubermensch to emerge undermines social cohesion. It is also inflationary, pushing the price of London homes up to levels that only ubermencsh can afford without ruinous debt.

All that is before we even open a copy of The Spirit Level to see the likely consequences of an increasingly unequal society.

Hastings was responding to a survey which showed that FTSE chief executives were earnings were up 32 per cent last year alone. The problem is accelerating.

Nor is it clear, without major shareholder activism on the part of currently supine institutional shareholders, how this problem is going to be tackled.

What we can do, as Andrew Simms and I set out in our report The Ratio for the New Economics Foundation, is strengthen the hands of the activists by insisting that companies over a certain size should publish what we call The Ratio.

The publication of the crucial ratio between lowest and highest paid in every public company would encourage debate about pay and corporate responsibility.

It would, we believe, kickstart a more informed debate about what kind of pay gap is acceptable and what is simple divisive and inflationary. It would also have a healthy effect on both on fairness and equity in the UK, and on the companies themselves.

Our recommendation is every public company should be required to reveal this, and also companies seeking government contracts which are over a certain size.

The sooner we can make this happen, the sooner it will start drawing investors’ attention to what are the most important and relevant aspects of corporate pay.

While disclosure of the size of CEO salaries, as happens now, may simply tempt remuneration committees into greater levels of excess, disclosure of the ratio can potentially shame or guide the corporate world into more equitable arrangements – or to explain why they are genuine exceptions.

We also believe that this will be good for the companies themselves. It will allow them to row back the levels of greed and excess that have prevailed over the past decade.

That alone will save them on average around five per cent of their annual revenues (if they are to return to 1993 levels of CEO pay) which they are paying so inefficiently at present.

It will also require them to take some account of a measure of equity that we have known for some time is also an indicator of corporate success.

Exactly how that success might be measured requires further research, but companies that had a lower pay gap, as revealed in their ratio, are demonstrably better corporate citizens, with longer time horizons and a better understanding of the value of their own staff.

We also know there is a link between high quality work and pay equity within companies.

The sooner we can insist on the publication of the ratio, the sooner we can begin to see which companies are poised for success and which remain corporate dinosaurs waiting for their next government pay-out.

David Boyle is a fellow of the New Economics Foundation and co-author with Andrew Simms of The Ratio.

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18 Comments

  • Andrew Duffield 12th Jul '11 - 11:25am

    Illiberal froth I’m afraid David. Excessive pay is a direct consequence of uncollected economic rent – as you know. Recapture that for the community (whence it came) and firms would be able to get on with growing the economy rather than spend time on yet more intrusive state regulation, form filling and – of course – avoidance of the same.

  • For centuries, land owners have built grand country estates on the proceeds of their farmer tenants and serf labourers. Since the Industrial Revolution, self-made industrialists have become wealthy on the back of a wide gap between the pay of their mill workers and that of the board. It is human nature to exploit advantage and to profit at the expense of others. There will always be those who exploit others for profit.

    Two world wars bankrupted the UK. We spent everything on the war effort and ran up large debts with the USA in the process. Edwardian era decadence, the disproportionate death rate amongst the younger members of the “officer class” and punitive post war taxes brought financial ruin to many of Britain’s upper class families and in doing so narrowed the gap between Britain’s richest and poorest.

    While the first half of the 20th century brought about the fall of the upper class, the socialist struggle of the 60s and 70s started the rise of the working class. Increases in pay and reductions in working hours helped narrow the divide between rich and poor but socialism went too far. It was inevitable that once released, the pendulum of political power would swing though the centre and over to the far left. The now over-powerful and bullish trade unions drove their cause beyond the limits of public opinion leading to the Winter of Discontent. A new Thatcherist era of “greed is good” was born. The pendulum swung back to the right and the Thatcher – Blair decades started the gap between rich and poor widening again. Corporate pay is merely the vehicle by which the divide between rich and poor is growing. Human nature is taking its natural course. The big question is what can be done to stop it?

    I agree with the aim of reducing the pay gap between the richest and poorest in society. I fully support the notion of a living wage but I’m also open to entrepreneurs and industrialist being appropriately rewarded for their success. We need these people to help the economy thrive – a thriving economy is what employs us all. Punitive taxation stifles economic prosperity. A fairer distribution of economic wealth should be our aim but by what means?

    I doubt that publishing the “The Ratio” figures will achieve much. Even with the current public ire at the Murdoch empire, sales of The Sun and subscriptions to Sky are not being cut drastically – the only real way for the people to force change. Corporations with less than direct links to the consumer are unlikely to suffer at all. There needs to be change to curb the excessive growth in executive pay but this alone is not it.

  • Don Lawrence 12th Jul '11 - 12:40pm

    Totally the wrong approach, being essentially analytical number crunching rather than value based judgement. I might have had a bit more faith if the writer had not included “Exactly how that success might be measured requires further research”. More like, “Give people like me more money and we will spend it.”

    The only way to increase shareholder activism is by making all shared funds determine their investors’ requirements and vote in that proportion. That is the best way to overcome vested interests.

  • @Andew Duffield

    I have some issues with your post:

    i) This is hardly intrusive or time consuming. Get the highest paid person on the payroll’s salary, get the lowest paid person’s salary – divide the numbers, post it. Not too strenuous. I don’t buy into the whole fallacy that any kind of bureaucracy or state intervention on any scale is always bad, particularly when the effort involved on the part of the companies is so tiny.
    ii) I really fail to see how this is illiberal. The author proposes that companies publish a figure and that the government does nothing with it except that hope that companies will try and reduce it. Quite frankly, this seems pretty economically liberal to me. I also doubt it will do much either way if it happens, though this may be just because I’m very sceptical of economics and social sciences in general.
    iii) Recapture uncollected economic rent for the community? That isn’t exactly a very detailed proposal! How would you perform this recapturing?

  • Jonathan Monroe 12th Jul '11 - 1:16pm

    It seems to me that a 90/10 or 90/50 ratio would be much more useful than a top/bottom ratio. The top/bottom ratio is the ratio between the highest-paid employee, whose pay package is almost always already published (because they are the CEO) in more detail than a simple ratio would allow, and the lowest-paid employee, who is almost certainly an intern or trainee of some kind – and who is paid nothing in increasingly many businesses, making the ratio meaningless.

  • Andrew Duffield 12th Jul '11 - 4:36pm

    @DunKhan

    “Recapture uncollected economic rent for the community? That isn’t exactly a very detailed proposal! How would you perform this recapturing?”

    It’s been a detailed Liberal policy for over 100 years: http://libdemsalter.org.uk/en/

  • Just a quibble – I think the “filthy rich” quote was from 1998, not ‘a couple of years ago’.

  • Daniel Henry 12th Jul '11 - 6:05pm

    I don’t see what’s illiberal about it, it just gives people more information about the businesses people are dealing with.

    If it was to include the wage of subcontracted jobs, it might encourage companies to give contracts to companies that paid wages better.

    I don’t think itself would solve the problem but wouldn’t it at least be a useful tool for equality campaigners?

  • John Roffey 12th Jul '11 - 8:51pm

    I am afraid there is little likelihood of any state intervention having anything but a cosmetic effect. Whilst global corporations have greater budgets and significantly more power than medium sized countries – they will always find ways to circumnavigate the laws of a single nation or group of nations.

    It is the global free market that allows these mega-corporations to grow and to continue to grow – and, as we have seen, create a race to the bottom for, all but, the most exceptional employee. If redistribution is truly the goal, this can only be done by a return to import, particularly, and export controls so that the nation can determine what work is to be done by nationals and what by overseas labour.

    A momentous task – but, I think in the final analysis, the only route with the possibility of success. Mega- corporations remove the vast majority of opportunity from the, would be, entrepreneur. There are some industries that require vast corporations to tackle the vastness of the task – oil exploration being an obvious example. However, for the vast majority of business ventures a great size is not necessary – only so that they might compete with others in the market place. Restrictions on size of businesses and breadth of activity would be the way to start this process.

    With Peak Oil in the offing, local businesses satisfying the majority of local markets needs will be the way forward. Not the transportation of goods crisscrossing the globe in search of the highest profit.

  • Liberal Neil 13th Jul '11 - 10:04am

    I broadly support the proposal. On a personal level it would give me more information with which to make choices as a consumer. It would almost certainly have some impact on the ratio in some companies and that would be a good thing. Forcing the BBC to publish more information about the ludicrous amounts it pays some of its ‘talent’ has already had some impact, for example.

    That isn’t to say there aren’t also other policies that should be pursued as well.

  • Yes, it makes sense to publicise the ratio. No, companies should not be forced to do so. If the public subsequently trust and engage better with companies that publish a ‘good’ ratio then the act of publishing it will appear to be useful.

    If cutting executive pay really saves 5% of annual revenue, companies that do so (and reinvest or offer better incentives to non-executive staff) should outcompete those that don’t.

    The ratio is obviously not going to be comparable across all sectors. A small software development firm with mostly highly-skilled programmers and 2 or 3 in management positions will probably have a tiny ratio. A call centre with hundreds of phone operators and a bigger management pyramid on top will be much bigger.

    Reducing the in-company pay ratio doesn’t necessarily tackle pay gaps across the whole population. Firms with large numbers of low paid staff would probably cut executive pay (as raising the wages of all at the low end would be more expensive) whereas small firms (which probably would have a higher median pay anyway) could afford to raise their bottom pay scale and keep high executive pay. This would then increase the between-firm pay disparity.

    @John Roffey: you make it sound like “competing with others in the market place” isn’t necessary. The lack of competition is called monopoly. It means no choice for the buyer and the seller can charge pretty much what they want. The ability to compete might not be strictly “necessary” but it’s pretty important in getting a fair deal for the consumer.

  • Sandy Walkington 13th Jul '11 - 2:17pm

    We have to be careful not to narrow the focus too much on public companies. There are street after street, square after square in London with houses costing millions of pounds. They aren’t all lived in by FTSE 100 executives. A lot of the really high earners who live in these houses are totally hidden (lawyers, accountants, consultants etc) – arguably doing far less to create wealth than people actually running companies. Yes I agree with the premise that the income disparities in modern Britain are too great – but people running companies should not be singled out as whipping boys simply because the law requires them to be transparent about their pay.

  • Ed Shepherd 14th Jul '11 - 7:34am

    I can tell you the ratio of earnings between those at the top of a company and those at the bottom: It is the ratio between zero income (for “graduate trainees” and “interns”) and millions in salaries, dividends and pension contributions for those at the top. Now I know what the ratio is, what do I do about it? I have absolutely no influence whatsoever over the activities of vast private companies that often operate in a monopolistic or near-monopolisitic situation.

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