Work and Business: Radical action on top pay

Since we were established in 2012, the High Pay Centre has tried to put evidence and analysis at the centre of the emotive debate about top pay. We want to identify how Government policy on the growing pay gap can achieve the best social and economic outcomes for the UK.

There is a tendency to see rising executive pay as a moral outrage. How can anyone be paid 160 times as much as someone else? How is it right that a banker who disgraced his own employer can leave with a £50 million payoff while 3 million people across the globe die every year because they lack access to drinking water or basic sanitation? These are legitimate questions and in a more just world they might be enough to force change. But until we build that better world in the long-term, arguments based on a robust socio-economic case will be necessary to convince politicians in the world we actually live in today.

Arrayed against the case for radical action on top pay is the immense power of big business. Corporations and their supporters generally rely on a series of assumptions that betray their worldview – business leaders are ‘wealth creators’ (supposing that these individuals rely on their innate genius, rather than education; training; the support of colleagues; and an advanced infrastructure including public transport and billions of pounds worth of public spending on research and technology). The UK needs to attract and retain ‘top talent’ (again supposing that talent is innate rather than nurtured and that money is the only thing that motivates people).

The most trenchant defenders of top pay are also often its biggest beneficiaries – business groups like CityUK and the CBI, both of which have spoken out against more radical policy proposals, are funded by major corporations led by people in receipt of hugely generous pay packages. At the High Pay Centre, we found it amusing to be described as ‘lobbyists’ when providing comment in support of pay ratio disclosure in a recent Financial Times article – the top pay debate is one in which think-tank employees, unfortunately, have very little personal stake, unlike the top lawyer and business group representative also commenting for the article. It was slightly eccentric, therefore, that we were described as the special interest group.

In fact, our work is largely evidence-focused, showing, for example, the shocking growth in top pay. In 1998 a FTSE 100 executive was paid nearly 60 times the average worker. In 2012 it was more than 160 times. The value of the FTSE 100 index was more or less constant over the same period. Since 1980, the share of the UK’s total income going to the richest 1 per cent has more than doubled, from less than 6 per cent to 13 per cent. We are now one of the most unequal countries in the developed world.

Research debunks many of the arguments that this has been a necessary price to pay for economic success. For example, academic studies show that CEOs promoted internally perform better than those hired from competitors, suggesting that training and nurture are more important than nebulous ‘superstar’ qualities. Analysis of the world’s biggest companies found that, of the top 500, less than 1 per cent had poached their lead executive from an international rival, rather quashing the notion that seven or eight figure pay packages are necessary to prevent an executive exodus from the UK. There is also a growing body of evidence that higher pay gaps within companies erode employee morale and result in poorer business performance, while the evidence of the difference that a CEO actually makes to a company remains much harder to discern.

These debates have created a space for more radical action on top pay. Labour is currently committed to ‘requiring companies to publish the ratio of the pay of their top earner compared to the average employee.’

As with any policy, much of the success of this measure depends upon the detail. Should it be the average or lowest-paid employees? How to stop companies contracting out low-paid work to present a more favourable picture of their internal pay gap? But the policy is largely both economically and socially sensible.

The fact that John Lewis cap their pay ratio at 75:1 (and pay all staff a bonus, not just senior managers) is seen as a critical factor in the company’s success. It encourages loyalty from employees and a commitment towards corporate goals. Therefore, investors might be interested in seeing how this compares with other major retailers. Similarly, pay at major banks has a serious reputational impact – publishing pay ratios is relevant to investors concerned about their bank’s standing in the eyes of the public.

Improved transparency on pay gaps also supports campaigners and consumers seeking to encourage ethical choices. Some organisations have already sought to use ethical pay and investment policies as marketing strategies. A publicly available pay ratio could create pressure to make pay more equal, rather than the existing culture of holding down pay at the bottom and outbidding the market for executives at the top. It would not reverse pay inequality on its own, of course, but this organic, market-led aspects of the policy cohere with Ed Miliband’s ‘predistribution’ agenda.