It’s time for a maximum pay ratio

Green Politics

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. 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.

  2. Leon Wolfeson

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

  3. 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.

  4. 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.

  5. 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.

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