Executive pay is damaging the reputation of business

Addressing dysfunctional levels of corporate pay is necessary to create the kind of stable society that business needs in order to flourish

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The astonishing sums of money raked in by bankers, big business leaders, fund managers et al are doing more damage to the reputation of business than any other issue, according to a survey of Institute of Directors members published today by the High Pay Centre.

52 per cent of respondents identified ‘anger over senior levels of executive pay’ as the biggest threat to public trust in business, just ahead of product mis-selling and negative portrayal of business in the media.

48 per cent said that declining trust in business was an important threat to the success of their own company, against just 26 per cent who said it was not.

This rather skewers the argument that it is somehow ‘anti-business’ or ‘the politics of envy’ to want to address dysfunctional and disproportionate levels of executive pay. Sensible commentators, including plenty on the political right, have argued that reducing top pay to the point that, say, a FTSE 100 Chief Executive has to work for a week – or even a whole month – to earn the average UK worker’s annual salary, rather than just two days as is currently the case, is a necessary pre-condition for the kind of stable society not riven by bitterness and division that business needs in order to flourish.

Our survey findings suggest that beyond the boardrooms of Britain’s biggest mega corporations, most businesspeople themselves agree with this assessment.

The Labour Party’s economic policy paper ‘A better plan for Britain’s Prosperity’ released last month contains some sensible measures for making big business more accountable over top pay: putting elected workforce representatives onto the company ‘remuneration committees’ that set top pay, and forcing investment funds who control shareholdings on behalf of ordinary savers to disclose how they vote when pay policy is put to a shareholder vote.

Recent research from the TUC found that the average pay for a ‘RemCom’ member is around £450,000, roughly 16 times the UK average. It is hardly surprising that these people have become quite cavalier about pay increases amounting to tens or even hundreds of thousands of pounds for directors who already earn millions. A reality check from ordinary workers who won’t accumulate that amount of money over their entire lifetime might encourage a more frugal use of company funds.

Similarly, the TUC found that over a third of RemCom members are themselves executives of other companies whose own pay is dictated by wider executive pay trends and are thus incentivised to wave through huge pay increases for other business leaders, while the fund managers who vote on executive pay policy on behalf of shareholders once it has been finalised by the RemComs also benefit from a culture of high pay.

Executive pay is essentially a market where the seller sets the going rate using someone else’s money. This is a view as likely to be expressed in Moneyweek as in the Morning Star and corresponds with that of Institute of Directors members. Therefore, the howling of vested interests and misguided free-market fundamentalists that it is ‘anti-business’ can be safely ignored.

Luke Hildyard is a contributing editor to Left Foot Forward

15 Responses to “Executive pay is damaging the reputation of business”

  1. David Davies

    There is no public trust in the tax dodging thieves who continue to make hay, whilst the sun shines on them. They do it, because they can; and there is no political will to get them to pay their whack, either.

  2. Faerieson

    As you write, it is entirely ‘because they can,’ and bears no comparison to ‘what they’re worth.’ The climate now appeas to be outlandish remuneration for the failed CEO, whilst the regular-overtime-for-no-recompense worker continues to shoulder the weight of anything ‘austerity.’

  3. Ian

    Quite right that business’ reputation is being damaged, if only it was damaged in the bank balance, too. We have let these people believe they’re some sort of gods with all the nonsense about ‘wealth creators’ and ‘job creators’ and humouring them whenever they have a hissy fit about maybe paying a bit more tax or maybe paying their employees properly.

  4. Leon Wolfeson

    Another reason I feel a basic income is a good idea. It cripples business’s leverage over workers. And makes it a lot easier to collect many forms of tax.

  5. Ian

    It more than likely almost pay for itself in administration cost savings, too. Nt going to happen with any of the three main parties in government, though. They all seem to be under the impression they’re in favour of a free market, though by ‘free’, I mean ‘heavily rigged in favour of business’…

  6. nodbod

    They are wealth creators for themselves. Trickle down has been shown to be pie in the sky. As for job creators there was an American entrapreneur on another blog site that said that the first thing management teams do is reduce the workforce where ever and when ever possible (wish I could remember the source). Really good article here “http://msc.gutenberg.edu/2013/03/adam-smith-was-no-laissez-faire-ideologue/”

    No company acts in complete isolation; it is dependent on stakeholders within (employees) to do its business. The law could be changed tomorrow to fix the rewards to a multiplier of the wages within the company. Unfortunately, as the article points out, the rewards are invariably nodded through by a cabal of like minded people, seemingly with no regard for company performance or any other criteria except boasting rights.

    If a company is doing well and the people at the top deserve their 10, 20 or 50% rise then surely this deserves to be reflected throughout the entire company.as everyone contributes to this success.

  7. Leon Wolfeson

    Well, remember that is replaces 95%+ of the entire current burocracy. There’s no need for separate pensions, no JC+’s, no “work program”, etc. – and things like tax becomes easier to handle, since all income is taxed.

    (All you’d keep would be a few exceptions like extra cash for badly disabled people)

    And they say “free market”, but they mean “capitalist”, which is a distortion of the free market. (I’m a Mutualist ^^)

  8. Leon Wolfeson

    I call it “dribble down”. What falls from the stuffed, overflowing maws if the 1%.

    I disagree that fixing rewards, per-se, is a good thing, though. Germany’s model of having workers on board and helping set compensation is more useful, for instance, as are higher marginal tax rates on very high incomes.

    Then there’s encouraging mutual and cooperative companies, like John Lewis – which do exactly what you suggest: everyone in the company gets the same % bonus salary, from the boss to the store worker.

    Let’s free the market from capitalism, not chain it to the state.

  9. Ian

    I have yet to hear a decent argument against a basic income. Some reckon it will make people lazy and stay at home instead of working but it wouldn’t be set high enough to live the lives we’re used to now, it would just enable people to choose what work they did and force employers to pay more for badly undervalued work, like care assistant or shop worker. socially useful jobs are underpaid, it seems. There’d be fewer hours worked per person, too, ensuring work for all who want it (though I’m not sure how governments would get away with creating unemployment for inflation reasons like they do now…)

  10. nodbod

    I agree with you re-Germany and representation on the renumeration group but this will never happen under this party of capitalists nor, I suspect, a Labour government. A policy such as this would force them to recognise that those not in the 1% have something to contribute and I believe that they do not care and do not want anyone except the 1% to have any rights at all.
    Germany just seems to have a more grown-up approach, more inclusion, rather than our more confrontational methods.
    Fixing a percentage from top to bottom is easy to put in place.

  11. Leon Wolfeson

    Well, we’d have to debate levels. *But* at most discussed practical levels we couldn’t ditch a significant degree of housing benefit in the short term, unfortunately – the market is simply too overheated for that. If rents were driven back down to, oh, the 1995 levels (about two thirds of the rise since Thatcher’s “reforms”)…

    If you look at the studies later done on basic income trials, you’ll see that it doesn’t actually reduce work done significantly for most people – the observed effect is about 5% less work*, and has concentrated on the second earner in two-income families

    (*The Omitara study showed an increase, in work, but that was likely due to the fact that from a cripplingly poor situation, they could now use a basic income to guarantee i.e. micro-loans for starting businesses, etc.)

    Two specific groups – heavily pregnant women and 16-19 year olds in full-time study* work a lot less, yes. But there’s good examples of where, perhaps, they shouldn’t be working anyway!

    (*It’s very arguably it would apply to University study as well, which I’d be fine with!)

    The SJI study in Ireland indicated a 50% rate of income tax would be needed, but I suspect that could be lower if you had a simpler and more effective tax on non-wage income.

    Remember there wouldn’t be a minimum wage per-se under a Basic Income, but there’s also no poverty trap of withdrawn benefits.

    Even some right wingers – and I mean real hardline right wingers like Tim Worsall – have come out in favour. Because it *does* eliminate.those poverty traps. (He also had a poke at the “comfort” concept, but honestly he was doing it to be contrary)

  12. Leon Wolfeson

    Well sure – that’s why I also strongly support voting reform.

  13. Leon Wolfeson

    It’s *simplistic* and won’t work. It’s a “closed for business” sign, which would lead to i.e. a lot more outsourcing and complex pay arrangements (the boss is employed by the Luxembourg branch (postal box), etc).

    Wages are not even the real issue – they’re pretty much a sideshow to the issue of low taxation of capital!

  14. nodbod

    Sorry, Leon. You are going to have to explain “low taxation of capital”. I am nowhere near as clued up as you.

  15. Leon Wolfeson

    No problem –

    If someone earns say £1000 from capital – the stock market – then they’ll pay less tax than on £1000 of income. Lots less. And the marginal rate is low, too.

    Worse, capital has taken an increasing share of GDP, at the expense of wages, since the 1970’s and very rapidly in the last five years.

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