Pay ratios, inequality and fairness

I’ve little time for Jeremy Corbyn but just occasionally his instincts are right- as when he recently raised the idea of pay controls for the highly paid. 

Now of course the random way he presented it made it an easy target but I was surprised and disappointed how quickly people dismissed the idea. Either its apparently ‘just bonkers’, or won’t work, or is bad politics or all of the above.

But I don’t think it is. Yes, we need more than just a cap on pay ratios to address rising inequality and the rising inequality of power that comes with it. Yes, rich people have other sources of income than salaries- including dividends, capital gains and rental income. Yes, the politics may be hard- but I suspect that’s more to do with how our perspective has narrowed after too much centralism over the last 30 years.

In the 1960s the ratio of a CEO’s pay to that of the average worker was around 20:1, rising to around 40:1 in the 1970s. What is it now? Around 150:1 in the UK and still rising. There is no convincing evidence that such massive increases of pay, so that a FTSE 100 boss earns £5.5m a year, is really linked to the brilliance or the insight of the leader, or the output or the outcomes for the company.  

On its own a pay ratio cap won’t solve inequality but it certainly won’t make it worse. As I’ve written elsewhere:

Equality matters because ultimately, people need dignity and respect, they need the ability to execute their life plan, they need a sense of fairness in all of the rules and institutions and processes of society…it is fundamentally whether I feel I am an equal citizen of equal worth.

Pay ratio caps would be a clear sign that we are all actually part of something collective. For the public sector, where we really want a sense of service, rather than leaders driven by money, we can start with a ratio of 20:1, giving top public servants a handy £200,000+ salary. In the private sector, we can start with publicly listed companies and those enjoying limited liability and go for a target of 40:1 over time.

Now the objections are: it will destroy commerce and business; it’s too hard politically; we won’t be able to compete or attract top talent; it won’t achieve its aims; it will be too easy to avoid.

My response- it won’t destroy business- we lived with these ratios in the 1970s and were fine. It is hard politically but given the urgency of addressing the problems of disconnect and inequality we face then a bit of Kennedy-like ‘doing it because it is hard’ seems appropriate. More seriously, much lower pay levels would indeed drive away many from the public sector or those enjoying limited liability. But having met many of those running the big companies, I see no evidence we couldn’t replace them with equally competent people at lower salaries. If you want higher reward, take the higher risks of unlimited liability. As for achieving its aims- coupled with other measures it would, and anyway the central aim is to show solidarity, rebuild trust and give people that sense of fairness and equality we so obviously lack at the moment. Avoidance- well we may drive a move towards non-salary rewards but other measures can be considered- capital gains reforms, taxing gains on capital and income at the same level above a threshold, wealth taxes etc.

One thing people always seem to forget is both the crucial role of the public sector in creating wealth, and the enormous benefits we allow companies and their owners and leaders to have by allowing limited liability and a legal persona. We have always expected duties on companies in return, and a pay ratio cap would merely be the latest.

I don’t pretend it would be easy- but to make the basic structure of society fairer and more equal, it seems to me it’s a vital reform…

* Dave Gorman is a member of the Scottish party and blogs at liberalismfive.co.uk

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31 Comments

  • Dave Gorman is right to suggest that we should have a strong policy on executive pay. Whether his solution is right is another matter. The fundamental problem is that it really is an issue for the shareholders and for them there are two problems: first executive pay rarely has a noticeable impact on corporate profitability, it’s just not a significant enough sum; second the “shareholders” are mostly fund managers who get paid very highly and are unwilling to rock the boat.

    Here is a suggestion: the corporate tax rate could be adjusted depending on the ratio of executive pay to average pay. This would make it significant for shareholders.
    The problem with it is the ratio needs to be different for different industries. The average pay at Goldman Sachs is many times the average pay at Sainsbury’s but the job of CEO could be equally difficult. perhaps we could have sectoral ratios?

  • Simon McGrath 13th Feb '17 - 10:27am

    lets assume that you could still hire people to run big PLCs with a pay cap (I doubt you could, but leave that to one side).

    The net effect would be that profits would go up and instead of taxing their incomes at 45% Income Tax + 2% employee NI + 13.8% employers NI the extra profits would be subject to 20% Corporation Tax. net result more money for shareholders, less money for the state.

    Can you explain why you want that ?

  • Little Jackie Paper 13th Feb '17 - 10:46am

    I have to ask – did you appear on Are you Dave Gorman?

    Simon McGrath – ‘net result more money for shareholders, less money for the state.’ Sorry, are you saying that is necessarily a bad thing?

  • David Evershed 13th Feb '17 - 10:54am

    In my view the reason CEO salaries have risen so much is because top talent found that business owners and/or founders were able to make far more than employees.

    By CEOs moving away from their employed status and setting up their own company or providing services as a self employed person they can potentially make far more cash. For example, Bill Gates would never have made the same fortune working for IBM as providing IBM with the operating software for IBM Personal Computers from his own Microsoft company.

    This trend was accelerated during the internet boom in the late 1990’s when people could set up companies with far less capital than in the past and there were investors willing to back them. Similarly, investment bankers found that despite their high salaries they could make 10 or 100 times more by setting up a hedge fund.

    As a consquence, to stop the loss of CEOs and investment bankers, companies had to raise the salaries and bonuses of their top talent.

    Restricting the ratio of the the salaries of the highest paid employees to the lowest paid employees will just further encourage top talent to provide their services via a company they set up for themselves as the owners – with the consequent risk of losses but hugh gains.

    I make no judgement about whether the position is a good thing or a bad thing – it is just the way things have to be in a free capitalist economy. The alternative is state control and communism. The Microsoft, Google and Amazon business models don’t get created under communism.

  • Dave, I congratulate you on being prepared to raise such a thorny subject, knowing that you don’t have the answers. You are right, that too many were too quick to mock Corbyn, albeit the problem there was yet more half-baked plans from the leader of the opposition who is weak on detail.

    There are many problems for the successful implementation of an executive pay cap, not least the general uneasiness from the public about such meddling by government, and we can be sure such views would not get a fair hearing from most of the press. Nevertheless, I do think there is public appetite to reduce inequality, and the pay gap is a huge part of that.

    It would seem reasonable for there to be a ratio cap in the public sector, with special attention given to dubious golden parachute, and special consultancy deals.

    I’m a fan of more employee representation on boards, and I think this is good for business, not just for the workers. It’s much more common in Germany and Japan, so we should find a way to encourage UK firms to do the same.

    Inheritance is a huge source of inequality. People can get upset at the idea that they are being taxed on money someone wants to give them, but at the end of the day, they didn’t work for it, and the fact some people are able to pass on hundreds of thousands to their off-spring is one of the reasons some people can afford a decent deposit on their mortgage while many who work just as hard cannot. I would like to link the tax free threshold for inheritance tax to either the national median salary, or to the legally set minimum wage, or maybe a mixture of both.

    Someone working on the current minimum wage of £7.20 would need to work for 45,139 hours to earn (gross), never mind save, the equivalent of the £325,000 inheritance tax threshold that many think is far too low. At 40 hours a week, that works out at almost 22 years. If the children of the wealthy want tax free lump sums they haven’t worked for, then they need to support policies that help those on low and middle incomes earn enough for a reasonable standard of living.

    I’d be tempted to tie all of the tax thresholds to a ratio of the minimum and median wages. At the very least, it would focus attention on what those figures are.

  • @ David Evershed, “I make no judgement about whether the position is a good thing or a bad thing – it is just the way things have to be in a free capitalist economy. The alternative is state control and communism.”

    Oh no it isn’t.

    That sounds like a fatalistic surrender to the powers of greed and belongs to the wringing hands school of we can’t do anything about it laissez-faire liberalism so why not join the Tories.

    The alternative is effective progressive personal taxation – and the effective implementation of that policy.

    If you need a bit of personal motivation to introduce that, then go and see, “I, Daniel Blake”.

  • Just tax high earners more or find some way of encouraging companies to raise their wages for ordinary workers. The problem isn’t so much high earners individual wages, it’s more that there’s too much incentive to lower labour costs

  • More consistent, and less loop-holey tax laws for the highest earners would definitely help, and making sure that the tax lawyers, not just their footballer or pop star clients, are held responsible when it turns out that a tax efficient scheme isn’t legal, should help. However, as Glenn says, this should be about raising the wages of those on lower or medium incomes.

    Several years ago, my public sector job was assessed, and it turned out they’d been under-paying me for years, so I was to get a pay rise, which technically did happen. It was swiftly followed by several years of a pay freeze, or below inflation rise, so in real terms, I’m being paid less than the recommendation. Apparently, the country cannot afford to pay me what I’m due. On the other hand, as soon as an independent panel recommends that MPs get an above inflation pay rise, then it seems they have no choice but to implement it. Politician pay should rise in line with that of public sector workers. If they think the country is too poor to maintain nurses pay, then the country is too poor to maintain it for MPs. If they think that good quality people won’t want to be an MP without a proper pay rise, then they shouldn’t get away with it for teachers.

  • @ Simon I would ask if you are quite sure about the Times headline.

    After all as we all know there have been headlines like this for many years, and indeed there has been the very occasional successful rebellion, but the trend to ever higher executive pay continues unabated. All in all, a newspaper headline is an attention grabber, rarely a carefully analysed assessment of fact, or in the case of your Times headline, proof of likely effect.

  • Simon, I was talking in relation to others in the public sector. Apparently, the public purse cannot afford to maintain may pay in line with inflation. I have had to take a real-terms cut in my pay in order to help the country out. MPs, on the other hand, have decided that they are exempt from this, and when it is recommended they are due a pay rise, then they cannot possibly refuse. The fact that my immediate colleagues have also faced effective cuts to their pay is not any consolation. It was my whole point. And when I say colleagues, I don’t mean the Chief Executive, whose pay is immune to the national deficit.

    I don’t want to talk about my personal circumstances, but suffice to say that I have long since accepted that I could have earned much more to do similar work in the private sector, but for a number of reasons, including ethics, I’m happy with my choice. Nevertheless, it’s still unfair that some public sector workers have to take a pay freeze, on the sole grounds that the pubic purse cannot afford it, while MPs claim it would be immoral for them to refuse a pay rise.

    I earn a decent salary, and despite a real terms pay cut, can live within my means without problems, but I still feel the injustice, as do my colleagues. I can only assume that it’s much, much worse for those on a lower income who is struggling to be told that the nation cannot afford for their pay to go up in line with inflation, while politicians on salaries way above the national average get a pay rise way above inflation.

  • The Guardian 8 August, 1916.

    “The bosses of Britain’s largest public companies earned an average of £5.5m last year, and have enjoyed a 10% pay rise while wages in the rest of the economy lag far behind.

    Rapid inflation for the country’s best paid executives is being driven by a small, all-male group at the top of the corporate tree, according to the High Pay Centre, which published its annual survey on earnings at FTSE 100 companies on Monday.

    “There is apparently no end yet in sight for the rise and rise of chief executive pay packages,” said the centre’s director, Stefan Stern. “In spite of the occasional flurry from more active shareholders, boards continue to award ever larger amounts of pay to their most senior executives.”

    Leading company bosses now typically earn 129 times more – including pensions and bonuses – than their employees.”

  • A good article and nice to see more positive responses than the last time it was discussed. Many Lib Dems seemed to think it was a decent idea when Vince Cable was proposing it a few years ago so the reflex rubbishing of Corbyn when he suggested it the other week seemed like disagreement for the sake of it.

    Those who simply say these levels of executive pay are inevitable and unavoidable need to ask themselves why it was easy enough to hire CEO’s years ago when the ratios were much higher, and why virtually all of our competitors seem to be doing OK now while achieving far lower ratios than us :-

    https://www.bloomberg.com/news/articles/2016-11-16/ranking-where-to-work-to-be-a-rich-ceo-or-richer-than-neighbors

  • Eddie Sammon 13th Feb '17 - 11:38pm

    A 100:1 ratio is better. Such a ratio could get cross-party support. On pay it is important that whole remuneration packages are included and not just pay itself. For instance: pension contributions shouldn’t be excluded from it.

    Football is the industry where pay seems most out of control, so any pay ratios need to also apply to football and other industries. Pragmatism needs to rule the roost – it’s all well and good talking about past pay ratios, but look at the economy in the 70s.

  • I would like to agree with the article. It is a very modest proposal.

  • Simon Shaw’
    I was unaware that the Telegraph was so powerful it could decide MPs wages. Why weren’t we told that a newspaper was in charge of government coffers? Or could it just be that our MPs looked at the Telegraph and thought “yes how right they are, we must pay ourselves more”. The fact is the government is in charge of spending,, regulatory bodies an such as like, not the blummin’ Telegraph. It is utterly ridiculous to suggest otherwise. The Telegraph says we’ve got to, nothing to do with us guv! Seriously?

  • Glenn, the situation is not as you portray it.

    IPSA was established to, among other things, take all control over pay away from MP’s -despite the fact that in reality MP’s almost always had voted NOT to accept in full whatever payrise the relevant Independent body had recommended at any given time. That started under Thatcher and continued on to the 2,000’s.

    I said at the time that this would come back to bite the great British public and it has. IPSA now decides on an ‘appropriate rate of pay/payrise’ and MP’s do not get a vote on the matter. Hence the recent big increase ‘because IPSA ruled that MP’s needed to catch up’. MP’s would never have voted this through when all the Public Sector and much of the Private Sector had had their pay squeezed/cut in real terms post 2008 financial crash and post and when the Government is constantly preaching austerity and cuts. But MP’s no longer have any say.

  • Sue Sutherland 14th Feb '17 - 12:20pm

    This is an interesting article but like Jerry Beere and others I’d like to see a more equitable ratio achieved as part of a redistributive tax package. I agree that society is better for a more equal pay ratio but things have got rather more desperate than that. Our safety net for the elderly and those who are ill is at breaking point so we urgently need funds to rescue it, not only because of our wish for a fairer society but also because, as Brexit has shown, unfairness at this level engenders deep resentment and increases the appeal of far right politicians. We cannot carry on clawing back expenditure on vital public services, so we either have to borrow money or raise more taxes. I don’t see this as an either/or between salaries and inherited wealth because we need to be looking at all the fundamental causes of inequality and all the ways of raising the tax take in order to create the sort of society we as Lib Dems value.

  • Simon Shaw,

    Yes there is lots of scientific research on high pay as you should remember from many past posts on the matter. You could even do a bit of your own research to validate it. All company accounts have to include reports on executive remuneration and are available for public inspection on the companies website, often going back many years.

    Go on, give it a try.

    David

  • Paul Holmes,
    But what has that got to do with Simon Shaw’s assertion that we should blame The Telegraph? My point being that Telegraph has zero power to force the government to do anything.
    So please tell me how the Telegraph made MPS do any of this? Considering it as no authority over parliament, no regulatory powers or any means of imposing anything. I repeat it seems utterly ridiculous to claim otherwise. What I want to know is how the Telegraph achieved so much legally binding power that it is in anyway responsible for decisions made by governments? Coz Simon Shaw says we should really blame the Telegraph.

  • Eddie Sammon 14th Feb '17 - 3:02pm

    On pay ratios I always seem to think people are talking about lowest to highest paid worker. Is your proposal for Average worker across the country to highest in the company or average in the company to highest in the company? If average to highest then maybe we could work on a ratio of 50:1.

    If we include things like pensions and other benefits then we could possibly have the same ratios for the public sector as the private sector. I think that would send a good message for equality.

  • @Sue Sutherland – Having a more equitable pay ratio might help create a fairer society, however, I don’t see how this has much to do with the funding of the “safety net”. The “safety net” has a cost associated with it, which has steadily increased over the years as the extent of the safety net has grown ever larger. In a fairer society, there isn’t a group we can point to and deride and decide, in our blinkered moral superiority, they should bear a larger proportion of the bill; we have to bite the bullet and make the hard choices…

    So I think the issues around pay and particularly boardroom pay and inherited wealth, shouldn’t be confused with the taxation necessary to fund public services. Even though we may well use the tax system to both encourage behaviours that address the pay gap and discourage behaviours that don’t.

  • paul holmes 14th Feb '17 - 6:30pm

    Glenn, I’m not one to defend Simon Shaw and his penchant for verbal dancing on the head of a pin. But on this occasion I certainly don’t think he actually means what you say he does. He said ‘blame the Telegraph because their investigation/reports led to the setting of IPSA’ not blame the Telegraph ‘because they directly took or take these decisions’.

  • Simon Shaw,
    I get it. I just think its ridiculous, Not least of all because the expenses scandal actually started with a bunch of MPs fiddling the their expenses and not with the Telegraph reporting that they were fiddling their expenses. What your saying is like arguing that the great train robbery started with newspapers reporting about the great train robbery! After all not everything said in the papers about it was completely accurate. It’s excuse making for and blame shifting. But the fact is The Telegraph is not in power, never was in power, has no legal ability to form the wages policy of MPs and never did have. And this is why in a sense what you are saying comically ludicrous.

  • Simon Banks 15th Feb '17 - 9:28am

    I’m no expert, but Dave’s solution strikes me as very difficult to implement. Companies would find all sort of ways round it which didn’t appear as pay. However, he’s right that this is a problem for any party which believes in “liberty, equality, community” on all three counts, in fact: individual liberty is reduced if resources are sparse among the vast majority and showered on a very few; it’s clearly unequal; and blatant unfairness undermines communities unless they can do something about it. One small response that would look politically viable (outside the EU) would be to force companies whose pay ratios were among the most unequal to put the fact legibly on all products. Consumers could then take this into account.

    As for public sector pay, I agree. For a while the highest-paid local council Chief Exec was at Suffolk County Council. That is not the most difficult job in local government, yet she left under a cloud. But that doesn’t need central government legislation – just action in their own backyard and political pressure locally.

    At present hardly any really senior public sector people suffer any loss if they mismanage: in the civil service particularly, you get clobbered for asking the right awkward questions about an impending disaster and not for promoting a disaster. That could also be changed.

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