High pay damages our economy

One Society’s Duncan Exley argues high executive pay damages the performance of the economy, and the businesses which themselves award the pay.

Today we saw one of the most effective anti-capitalist PR stunts in recent memory. But this was not the work of the protesters camped around St Paul’s and Finsbury Square.

I refer to the data released today by Incomes Data Services, which showed that FTSE 100 directors had a 49% year-on year increase in total earnings. 

As the BBC pointed out, this is well above the average pay settlements of 2.6% for private sector workers (i.e. average employee pay is falling in real terms, because CPI inflation now stands at 5.2%).

Nor is this a new phenomenon. The equivalent data last year (pdf) showed that FTSE directors’ total earnings were boosted by 55%.

These pay rises are bad for business and bad for the economy, not only because of the PR damage they unfortunately inflict on business in general, but because such high pay rises damage the performance of companies and the economy.

It is often asserted that high pay is necessary to motivate and retain top talent.

However, the facts simply do not back this up: ever-rising pay has not been matched by rises in company performance. Numerous studies (and the financial crisis) show that stratospheric “incentives can result in a negative impact on overall performance”. The idea that executives will emigrate unless rewards continue to escalate is also unfounded:

“in the last five years only one FTSE 100 company has had its CEO poached by a rival, and that rival was also British”.

Remuneration practice in the UK over recent years sometimes appears to have been conducted in the (discredited) belief that directors are rare super-humans that need to be cherished and pampered, while the rest of us are mere human resources; however, studies (pdf) show:

“Wide gaps between top and bottom pay within an organisation harm performance.”

The bonus-driven rises in directors’ pay and the falls in employee’s real pay are not just an unfortunate coincidence. Directors can find themselves tempted to suppress wages in order to maximise the short-term profits on which their bonuses too often depend.

Remuneration committees are also often guilty of such an obsessive focus on the pay and performance of directors that they neglect to “be sensitive to… pay and employment conditions elsewhere in the group” (as the Corporate Governance Code requires). Requiring businesses to report on the ratio between directors’ and employees’ pay and requiring employee representation on remuneration committees will help to counteract this temptation.

The Department of Business, Innovation and Skills is currently consulting about how executive pay is set and reported. This is a great opportunity for the government to put in place polices which ensure that corporate pay practices are in the best interests of companies and the economy, by recognising that the whole workforce, not just the board, are important for successful business.

See also:

As top pay soars, the 99% are left behindWill Straw, October 28th 2011

All in it together, eh Gideon? FTSE fat cats see pay rocket 50 per centShamik Das, October 28th 2011

Miliband gets it right from top to bottomDuncan Exley, June 13th 2011

It’s time pay inequality became a priorityDarren Johnson AM, February 16th 2011

We cannot address public sector pay without addressing private sector payDuncan Exley, February 15th 2011

25 Responses to “High pay damages our economy”

  1. Political Planet

    High pay damages our economy: One Society’s Duncan Exley argues high executive pay damages the performance of th… http://t.co/HnHedTc0

  2. Michael

    High pay damages our economy l Left Foot Forward – http://t.co/Zz25cGzO

  3. Martin McGrath

    http://t.co/MwbGpprP Director pay rose 50% this year AND last… Are the rich are stuffing their pockets and getting ready to run for it?

  4. Neil Reid

    RT @leftfootfwd: High pay damages our economy http://t.co/xSTNC7Ee

  5. LME Executive

    RT @leftfootfwd: High pay damages our economy http://t.co/73dqJm4g

  6. davidschoibl

    RT @leftfootfwd: High pay damages our economy http://t.co/T6qCoNk4

  7. Angus Carruthers

    High pay damages our economy l Left Foot Forward – http://t.co/Zz25cGzO

  8. Karen Adshead

    High executive pay damages our economy, writes @One_Society’s Duncan Exley: http://t.co/5T5ncRd9 #OccupyLSX

  9. Mike in Aviemore

    RT @leftfootfwd: High pay damages our economy http://t.co/xSTNC7Ee

  10. Look Left – Cameron’s Euroscepticism comes home to roost | Left Foot Forward

    […] Duncan Exley wrote today on Left Foot Forward, these vulgar excesses damage the whole economy: “As the BBC […]

  11. LFRMillan

    Our take on today's figures on #exec pay: "High pay damages our economy" @leftfootfwd http://t.co/SqfdQlBN

  12. Leon Wolfson

    Bad headline. It should be “High Directors Pay”

  13. Dave Citizen

    OK so high pay damages our economy. It also damages our society in many other ways as well. The question is, what should we do about it?

    How far is it reasonable to go in protecting our society from the damage that ridiculously high pay and other manifestations of extreme inequality are doing to us? We need to start answering this question soon if Britain is to head away from declining standards of living and back towards mass prosperity.

  14. Jon Purdom

    I agree with comments 1 and 2. Wealth inequality, both in the UK and globally is the problem that we need to address. The entire structure of our commercial and political system is twisted. There are no goubt some very talented people at the top of the tree, but there are many others who are unexeceptional and recieve a similar wage purely because they were born into well connected families and went to public school and Oxbridge. There are also many very talented and hard working people who are virtually barred from these jobs because they went to the wrong school, talk with the wrong accent or worst of all – still have a conscience.

    This class system promotes an elitism that not only protects a ruling class of the rich and politically powerful, it controls most of the media and promotes the attitude that the unemployed, the disabled and the minimum wagers are unworthy of everything from education, to healthcare, to opportunity.

    It’s time that we broke up this unholy trinty of politics, business and the press.

  15. Alan Cowan

    High pay damages our economy | Left Foot Forward http://t.co/xTsvNPhj

  16. Dave Citizen

    Well said Ion – it’s about time Labour committed itself to a direction – I just hope they have the objectivity to see that it’s extreme inequality that is now the biggest barrier holding our country back.

  17. ALEX GILBERT

    High executive pay damages our economy, writes @One_Society’s Duncan Exley: http://t.co/5T5ncRd9 #OccupyLSX

  18. ‘Workers are children, and if you don’t like high pay, move to Cuba’ | Left Foot Forward

    […] High pay damages our economy – Duncan Exley, October 28th […]

  19. Duncan Vessey

    Onto the FTSE fat cats; here's why obsenely high pay damages the whole economy: http://t.co/23cqybF7 #bbcqt

  20. Ian Morgan

    Onto the FTSE fat cats; here's why obsenely high pay damages the whole economy: http://t.co/23cqybF7 #bbcqt

  21. Edward Hortop

    Onto the FTSE fat cats; here's why obsenely high pay damages the whole economy: http://t.co/23cqybF7 #bbcqt

  22. gina sargunar

    Onto the FTSE fat cats; here's why obsenely high pay damages the whole economy: http://t.co/23cqybF7 #bbcqt

  23. Jessica Rothhaar

    Onto the FTSE fat cats; here's why obsenely high pay damages the whole economy: http://t.co/23cqybF7 #bbcqt

  24. Alex Braithwaite

    Onto the FTSE fat cats; here's why obsenely high pay damages the whole economy: http://t.co/23cqybF7 #bbcqt

  25. Cable fails to provide a stick or carrot in the fight against obscene pay | Left Foot Forward

    […] High pay damages our economy – Duncan Exley, October 28th […]

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