It’s time for a maximum pay ratio

The average pay of a FTSE 100 CEO has rocketed from around £1 million a year in the late 1990s to closer to £5 million today.

The average pay of a FTSE 100 CEO has rocketed from around £1 million a year in the late 1990s to closer to £5 million today

The minimum wage was recently voted the most successful government policy of the past 30 years by members of the Political Studies Association.

Could a maximum wage prove equally popular? The time has come for the idea to be seriously debated.

The average pay of a FTSE 100 CEO has rocketed from around £1 million a year in the late 1990s – about 60 times the average UK worker – to closer to £5 million today, more than 170 times.

The High Pay Centre’s new report suggests that we should not employ a rigid cap to tackle such excess, but instead raises the idea of a maximum pay ratio. The highest paid employee of an organisation would not be allowed to earn more than a fixed multiple of the amount earned by lowest paid.

This would undoubtedly be a radical step. Indeed, when the High Pay Centre suggested that it was time to consider such a reform, some critics called the idea ‘extreme’. But it perhaps reflects slightly odd priorities to think that a democratically-enacted maximum pay ratio of (for example) 75:1 is extreme, but that demands for pay packages hundreds of times the size of those experienced by the average worker are not.

It also reflects a degree of detachment between the public and the world inhabited by politicians, think-tanks and lobbyists. While elite opinion decries even the most minor controls of the so-called ‘free’ market, around 80 per cent of the public support the idea of a requirement for executive pay to be tied to that of their lowest-paid employee.

Some forward-looking organisations already operate such a policy unilaterally. At John Lewis, the ratio is capped at 75:1. At TSB the gap between the chief executive and frontline staff is limited to 65:1.

If even these ratios seem large, this perhaps reflects out of hand pay has got at other organisations. Manifest/MM&K found that cross the FTSE 100 in 2012, the average pay ratio stood at 133:1… and this show the difference between CEOs and the average employee, not the lowest-paid.

Ultimately, a failure to address these inequalities will prove complacent. Concern about the gap between the super-rich and everyone else has reached its highest ever level, contributing to a wider anger at the perception of a self-serving elite comprising both politicians and business.

80 per cent of the public support government action to reduce the gap between high and low/middle income earners.

With pay for top executives increasing from £4.1 million to £4.7 million between 2012 and 2013, and inequality predicted to rise in the coming years, the government’s tinkering with shareholder scrutiny has had little effect.

It’s now time to contemplate bigger reforms – pay ratios could be one part of that. Worker representation on company boards should have a role to play. Taxation and profit-sharing are also important mechanisms. The High Pay Centre report discusses these and other ideas in more detail and can be downloaded here.

Luke Hildyard works for the High Pay Centre and is a Left Foot Forward contributing editor

24 Responses to “It’s time for a maximum pay ratio”

  1. David McKendrick

    Of course if you cap their basic pay the bosses will just get bonuses of several times their salary.

  2. Peem Birrell

    This would be a good idea if there was any evidence that the money saved on CEO pay would go to the rest of the staff…. Otherwise, it’s just envy really.

  3. Barry_Edwards

    I’m a believer in taxation rather than prohibition but how to ensure the tax is paid?

    How about calculating the amount of income tax that should be paid by a company’s employees and then making that sum payable by the company less any tax paid by the employees?

    So if an employee is using some form of tax avoidance the government gets the money from the company.

  4. Bernie Evans

    What Andrew Rawnsley in the Observer suggested is that Labour must adopt failed Tory policies of austerity or lose the election! (Labour needs to be candid about painful cuts it will have to make,15/06/14) “The cuts Labour would have to make” will certainly reduce the size of the state, but as the Tories have found, will not get rid of the deficit; as Rawnsley admitted, Osborne “was supposed to have it eliminated ” by 2015, but it will still be around £80bn after the election. Why should Labour adopt such ineffective measures, when transformational policies are needed to regain the trust of the disillusioned supporters who voted for Ukip in the recent Euro elections?
    When the austerity measures began in 2010, political commentators of all persuasions were surprised by the ratio of cuts to tax being in the region of 80:20, and Miliband needs to have the courage to say that his party will change it dramatically. Rawnsley mentioned some of the obvious ways a future Labour government would “raise extra revenues from tax rises targeted at the wealthy”, but there is intellectual and economic support for more. Piketty has shown the Laffer curve to be economic nonsense, and recommends that high-earners in the United States should pay 80% tax, so Labour has the ready-made theoretical justification for an all-out attack on inequality. Even the IMF has admitted the rich in Britain can afford to pay more! Labour has already unveiled plans for a 10% starting tax, and could develop this further with a sliding scale for income tax, so that by the time earnings reached between £65K and £150K the rate would be 45%. From £150K to £200K, it would rise to 50%, increasing incrementally, and stopping at 80%. Would that appear unreasonable to the majority of people in this country, where the number of food banks has increased exponentially under this government, and where average earnings are around £26K, an amount earned in two and a half days by the FTSE 100 bosses? Working full time on the current minimum wage yields the disgraceful annual gross income of around £13000. Parties which do not pledge to change drastically this situation, in the 7th richest country in the world, do not deserve anyone`s vote!

  5. nodbod

    As would the employees.

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