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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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.

  6. GO

    You’re missing the point (as I see it, anyway).

    Suppose you have a company whose CEO earns £1.2 million a year while its lowest paid employee 100 times less, £12,000. The CEO’s income is then capped at 75 times the income of his lowest paid worker – in those circumstances, £900,000. Whether or not that £300,000 reduction in his pay gets shared round 30,000 employees (say) is really neither here nor there – that’d only be £10 each anyway. However, the shareholders must now take account of the fact that the CEO’s pay is pegged to that of the company’s lowest-paid employees. If they want to get back to the point where they can offer a £1.2 million package, in order to attract the right person, they are going to have to start raising those lowest-paid workers’ wages towards £16,000. And that will mean accepting a bigger slice of their corporate pie going to wages and a smaller share to profits – which is exactly the direction in which we should be heading.

    The worries I always have, though, are these: firstly: what if a company’s lowest-paid workers are, say, cleaners on £12,000? What’s to stop them just sacking them all and contracting that work out, perhaps to a company that employs cleaners on worse terms, so that their own lowest-paid employees become, say, data entry clerks on £16,000? And secondly: shouldn’t the size of a company be taken into account? On the face of it, this proposal would mean the pay of a CEO of a company with 10,000 employees being capped at the same level as that of a CEO of a company with 100,000 employees (if the lowest-paid employees earned the same in each company). The devil is in the policy detail, I guess.

  7. Peem Birrell

    >>Piketty has shown the Laffer curve to be economic nonsense

    don’t think so….

    But taxing the minimum wage is outrageous.

  8. tangentreality

    The idea behind these high pay packets is that paying someone that much is reward for their special talent, and that the company’s profitability will increase significantly as a result. In other words, there is a business case to support the investment in that particular person.

    From a business point of view, it would be worth re-visiting this profitability vs salary situation, and informing shareholders of it. Is their investment in highly-paid staff really working out? Is it contributing significantly to results – are they doing noticeably better than their competitors? Are profits up? Or are they simply fuelling a wage bubble?

    If shareholders were equipped with this information, and had a much greater say in setting pay packets, I strongly suspect that executive pay would start to come down in accordance with the same principles which drove it up – market forces. This would be a better solution to simply legislating for an arbitrary cap or ratio, which could drive talent abroad. We don’t want it driven abroad, we simply want it at the right price. And so will shareholders.

  9. failquail

    It would need to be worded that any outsourced/agency work also counts, so that the lowest paid people aren’t hidden from the lowest paid in the company stat, but that wouldn’t be too hard to include.

  10. failquail

    So cap the bonuses too.

    A cap of 1-2 months worth of salary per year is more than enough for anyone.

  11. keyboard

    ‘ And that will mean accepting a bigger slice of their corporate pie going to wages and a smaller share to profits – which is exactly the direction in which we should be heading.’

    Total rubbish

    A country gets wealthier and increases the general living standard of all through increasing the productivity of labour. To increase the productivity of labour you must have capital investment. In order to have efficient and successful capital investment you need a free market determined profit mechanism. Any messing around with this will result in a reduced and less efficient deployment of capital, which in turn will slow the rate of progress for all in society.

    The reason why the poorest in society today live better than kings in the 18th century is capitalism. If the businessmen of the 19th century had arbitrary caps to the profit mechanism I can guarantee you the general living standard today would be significantly lower.

    Don’t interfere. Let workers and businesses agree their terms of cooperation on a case by case basis. As soon as socialists start trying to tell other people how to live their lives the results are disastrous on both a human welfare and economic level.

  12. Leon Wolfeson

    The laughter curve is real. It also cuts in at 75%+-3%

  13. Leon Wolfeson

    Labour already have adopted those policies wholesale.

    A 10% starting tax was and is a mistake, afaik – further cuts to services for the poor will result. The JRF report showed that for every pound a family saved from the higher threshold, FOUR pounds has been lost to cuts.

    Moreover, if the Tories go ahead and rush through combining tax and NI, it’ll leave millions without a NI record, which is already a major problem for low paid part-time staff!

    But…you’re also completely wrong to focus on income tax. Income tax is a minor side show. We need to be taxing where the wealth has gone – capital.

  14. Leon Wolfeson

    I completely disagree. This simply encourages complex measures to evade UK law.

    Rather, raise the tax rate on very high pay. And look at Germany’s mandating workers on renumerarion boards, etc.

  15. Leon Wolfeson

    This country is “getting wealthier”, in that the rich are skimming more. Real pay for workers is dropping sharply, on the other hand.

    Capital competes with wages, and it’s winning, and has been for some time – syphoning off almost all the economic growth since the 1970’s.

    You are assigning to Capitalism the benefits of the free market, which capitalism is a gross distortion and a leech upon.

  16. Leon Wolfeson

    A 1 month cap, for instance, would hit John Lewis employees.

    Blunt instruments tend to do this.

  17. GO

    For an increase in productivity/GDP to “increase the general standard of living for all” one or both of these things has to happen: wages have to rise across the board, or the government has to receive extra tax revenues and spend them on improving infrastructure, public services etc.

    Both of those things *have* happened since the nineteenth century, of course, but that’s because the labour movement has fought for higher wages and better public services. (It has also fought for many other things that tend to increase the general standard of living, of course: an end to child labour, shorter working weeks, better working environments, etc.) If they hadn’t done so, we might or might not have seen similar increases in productivity, but wages and public spending would have been held down. Hence that increase in the *general* standard of living would not have happened.

    If you think the increase in the general standard of living since the 19th century is evidence that the system we’ve had since then has worked, fine – but that system has been based on a mixed economy shaped by capitalists, socialists and others. The assumption that things would have been the same but better without the leftie influences is just that – an assumption. To justify it, you would at the very least have to describe and demonstrate the existence of a mechanism by which the general standard of living could increase while wages and public spending were held down by market forces and capitalists acting and voting according to the profit motive.

  18. David McKendrick

    But still OK to exploit workers in third world countries who supply the raw materials to the company.

  19. David McKendrick

    And all UK companies would have introduced the minimum wage without legislation…

  20. Leon Wolfeson

    Germany puts workers on those boards. Oddly enough, bosses who start with firing a lot of staff tend to earn less.

  21. failquail

    And? Let me repeat myself:
    A cap of 1-2 months worth of salary per year is more than enough for anyone.

    Same applies for someone on minimum wage or a CEO, more than a months pay is a huge amount of money.

  22. Leon Wolfeson

    How do you plan to address the payments made in HK to Swiss account? Oh right, no, it’ll be fine, and the limit will be on normal people.

    You’re just after business models like John Lewis, where everyone in the company gets the same % bonus. Oh, and let’s not forget people on comission, which falls under the same law.

  23. failquail

    “How do you plan to address the payments made in HK to Swiss account?”
    Well then you’d look at other things to tackle that new problem.

    What you don’t do is say “oh my, this is hard, so lets not do anything at all”

  24. Leon Wolfeson

    So you don’t have a plan.

    I’ve made clear what I’d do – proper taxation of high earners. Including their capital.

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