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Tackling Excessive Pay

Tackling Excessive Pay

A decade is a long time in politics, but the issue of excessive top pay has remained a provocative subject for politicians of all parties over the past ten years.

With wages and economic growth stagnating for much of the 2010s and the experience of the financial crisis still fresh in the memory, lavish pay awards for financiers and business leaders have been hard to justify. The argument that these individuals do unique and brilliant work that benefits the whole country is hard to reconcile with perceptions that the UK has under-performed socially, economically and environmentally.

Critics have argued variously that disproportionate pay awards for bankers and CEOs too often represent ‘rewards for failure’; that they exacerbate the gap between those at the top and everybody else; and they represent a remarkably inefficient allocation of resources – 15% of total incomes currently accrue to the richest 1 per cent of the population. If even a small proportion of this could be channelled to low or middle income workers instead, it would make a big difference to their living standards.

We have seen some corporate governance reforms in the past decade, for instance listed companies were required to publish a ‘single figure’ detailing the total pay of the CEO and give shareholders a binding vote on the executive pay policy set by the board. This has improved transparency and made pay practices cooked up between cosy groups of business leaders slightly more accountable.

The reforms included the requirement to publish not just the level of CEO pay, but ratios comparing it to the pay of the median, top quarter and bottom quarter of the company’s employees. This will give a practical insight into workplace inequalities and increase pressure on companies to ensure that pay growth for low and middle earners keep pace with those at the top. New reporting requirements mandating companies to explain how their directors have exercised their duties to different stakeholder groups also strengthen the Companies Act introduced by the previous Labour Government, which made clear that Directors  have responsibilities to their workers, customers and wider society beyond just simply maximising profits for their shareholders.

However, the impact of these changes has been limited thus far. The rocketing increases in CEO pay that occurred in the 2000s have slowed somewhat (the average FTSE 100 CEO’s pay increased from 60 times their average employee’s pay in 1999 to 130 times in 2009  and has fluctuated between 110 and 150 times every subsequent year) but it remains extraordinarily high.

Companies pay lip service to their responsibilities to workers and other stakeholders in annual reports, but the pressure to prioritise pay outs to shareholders above all else remains. Research by the High Pay Centre and the TUC found that dividends and share buybacks grew six times as fast as median pay for UK workers from 2014 to 2018.

Theresa May capitulated on her initial promise to give workers representation on company boards in the face of furious opposition from big business, meaning that company decision-making is still done in a top-down fashion where the perspectives of investors and executives dominate.

The 2019 Conservative manifesto suggests that they are fairly content with the existing corporate governance regime, and see no need for further changes beyond a vague commitment to ‘improve incentives to tackle the problem of excessive executive pay.’

The Lib Dem and Labour manifestos go further. Indeed, in terms of corporate governance structures they are very similar: the Lib Dems call for mandatory worker representation on the boards of large businesses and for responsibilities to stakeholders beyond shareholders to be formally incorporated into a statement of company purpose. Labour proposes that two thirds of company boards should be made of workers’ representatives and that directors’ duties should be rewritten to ensure that directors not only ‘have regard’ for their workers, the environment and wider society, but that these stakeholders’ interests are given equal weight to those of shareholders.

Labour also proposes an expansion of trade union rights, which will be critical to ensuring that when decisions on pay are being made, lower and middle income workers will have the strength in numbers to enhance their bargaining power relative to those at the top.

Despite the branding of the ‘Brexit election’ therefore, the poll will have a considerable impact on the pay culture and responsible business practices of the UK’s leading companies. Anyone concerned about corporate governance will be watching the results – and possible subsequent coalition negotiations – with interest.

  • Luke Hildyard is Director of the High Pay Centre, a think tank doing research and analysis on issues like pay, work and inequality.

PHOTO: Photo by Gautier Salles on Unsplash