Pay Ratios, Inequality and Fairness…

Pay Ratios, Inequality and Fairness…

‘For people to retain faith in capitalism and free markets, big business must earn and keep the trust and confidence of their customers, employees and the wider public. For many ordinary working people – who work hard and have paid into the system all their lives – it’s not always clear that business is playing by the same rules as they are..’

Even Mr Corbyn is Right Sometimes…

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 and the lack of nuance 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, noted that 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. We can be just too easily led by a consensus that slowly narrows our view.

A Little Background and Some Graphs…

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 147:1 in the UK and still rising, much higher in the US. 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 or the output or the outcomes for the company. Instead we have reports like this.

 

 

For example, this diagram below shows executive pay plotted against Total Shareholder Returns (TSR). If pay drove performance then you’d expect to see a bunching around a line or curve- but looks pretty random relationship to me.

 

 

What Has The UK Done?

Now the UK to be fair has a decent set of corporate governance arrangements in place, as part of a well established rule of law, clear corporate governance codes and steadily increasing transparency.

The Liberal Democrat Business Secretary Vince Cable introduced reforms in 2013 that including a binding vote on the pay policies of listed companies, and an advisory non-binding vote on individual pay, as well as increasing transparency requirements e.g. here 

When becoming Prime Minister, Teresa May promised further reforms to consider how to give stakeholders more of a say on pay, consider measures to connect to employee, customer and supplier voice, and consider extending requirements from public to larger private companies.

This is all set out in a worthy but rather modest Green Paper.

After the usual rather nice civil service summary of the issues, including this understated point:

CEO pay increases have shown some signs of restraint in recent years. The median 2016 increase so far for FTSE100 CEOs is c.2% (the same as the median increase in 2015), and less than 1% for the top 3013. This comes after very big gains since 1998, however, with a median pay package for FTSE100 CEOs in 2016 of £4.3m. Such high levels of pay may feed a public perception that the top end of the corporate world has become disconnected from the experiences of ordinary working people.’

…the paper duly sets out a few incremental improvements to consider. But there are not enough- reading this from the High Pay Centre gives the statistics. Indeed the white paper quotes polling data suggesting how strongly the public supports action on high pay.

(For example, Opinium research for PWC’s ‘Time to Listen’ paper published in June 2016 found that two-thirds of respondents believe executive pay is too high; and in a YouGov poll for CIPD in Sept 2015, only 14% of respondents agreed that CEO pay is good value for investors) (1) 

But it isn’t just a case of soaking in righteous outrage at fat cats. The paper fails because it considers executive pay to be the concern of owners, shareholders and direct stakeholders like workers, suppliers and customers.

All very well, but consider again the quote at the start of this post:

For people to retain faith in capitalism and free markets, big business must earn and keep the trust and confidence of their customers, employees and the wider public. For many ordinary working people – who work hard and have paid into the system all their lives – it’s not always clear that business is playing by the same rules as they are..’

The quote is actually from Mrs May at the start of the Green Paper. Reading it, it is crystal clear that executive pay is a problem for society, not just individual businesses. There have always been examples on pay restraint based on values, such as the Quakers, or from leading edge companies (John Lewis cap pay at 75:1, Lloyds at 65:1) but this is a systemic problem and requires a public/state led systemic response.

Not the Only Answer But…

Now, on its own a pay ratio cap won’t of course 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, with all the dignity, freedom and ability to execute my life plan that I expect.’

“Are you comfortable with your executive salary?”

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. If you want a higher reward, either don’t work for the public sector or use forms of unlimited liability, with their higher rewards but higher risks.

Oh! It It Just Too Hard or Impractical…

Why not? Well 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.

As I mentioned above, the polls however suggest that there is an argument to be won here.

My responses- 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 listed companies 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. As for achieving its aims- coupled with other measures it would, and remember, 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 reward 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.

As the Green Paper dutifully reports:

‘The United States, France, Sweden, Belgium, Switzerland, Australia and the Netherlands, for example, have all recently introduced, or are actively considering, new measures to strengthen shareholder rights over executive pay and increase public transparency.’

Part of a Broader Agenda …

“If CEO pay packets aren’t a problem… why doesn’t everyone get one?”

If pay ratios on their own don’t do the job, then what else do we need to consider. Well, greater transparency is a must, including in future much more detail on beneficial ownership of companies and land, as Dr Cable mentioned in his speech I linked to above. A great old liberal policy, and one that certain Labour thinkers also considered, is to require worker representation on boards, or to promote cooperatives and mutuals for their socially beneficial impacts.

In order to properly assess what the policy should be, remove the politics once agreed, and provide a firm evidence base, then we should adapt the current Low Pay Commission to take on a remit for advising on and regulating high-pay as well. We’ll have to overcome the Goldman Sachs problem but let’s be honest- we have more things to worry back with that ‘great vampire squid wrapped around the face of humanity‘ than just pay ratios

Finally, the ever-excellent Matthew Taylor CEO of the RSA, is reviewing the future of work for the government and we need to consider the possible role for basic income schemes on our fairness ideas.

In time we may want to consider either a high pay actual cap (100:1?) and tax breaks for those companies making progress, or faster progress towards our 40:1 goal.

 

 

Practical Steps…

‘Does my bonus look big in this?’

So, to summarise:

  • we create a Pay Commission, modelled on the Low Pay Commission but with a remit to create and maintain a high-pay ratios cap system
  • We restrict public sector pay ratios to a maximum of 20:1
  • Over time, we create pay ratios of 40:1 for those listed companies and companies enjoying limited liability
  • We continue to explore a broader agenda on the role of companies in the twenty-first century, how to empower workers and stakeholders
  • We keep pushing on transparency, in this area and on beneficial ownership, tax avoidance and a range of other harms that businesses can cause us.

And once more, why all this? Because unequal societies do worse than more equal ones, because equality and equal status is vital for the dignity of what it means to be human, and because as I set out in my post on the basic principles for a liberal society:

‘Principle 2- Social and economic inequalities are to be arranged so that they are both:

(a) to the greatest benefit of the least advantaged, consistent with the just savings principle..’

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

 

Notes

(1) Quoted in Corporate Governance Report Green Paper November 2016 Department for Business, Energy and Industrial Strategy

 

 

 

 

 

Author: DaveGorman

An Englishman longtime in Scotland, interested in new ideas for liberalism that recognise our challenges in the 21st century. Loves clouds, ideas, environment and applying liberal thinking to make things better. Speaking in a personal capacity of course.

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