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

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