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”
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.
Peem Birrell
>>Piketty has shown the Laffer curve to be economic nonsense
don’t think so….
But taxing the minimum wage is outrageous.
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.
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.
failquail
So cap the bonuses too.
A cap of 1-2 months worth of salary per year is more than enough for anyone.