Executive pay is damaging the reputation of business

Addressing dysfunctional levels of corporate pay is necessary to create the kind of stable society that business needs in order to flourish

 

The astonishing sums of money raked in by bankers, big business leaders, fund managers et al are doing more damage to the reputation of business than any other issue, according to a survey of Institute of Directors members published today by the High Pay Centre.

52 per cent of respondents identified ‘anger over senior levels of executive pay’ as the biggest threat to public trust in business, just ahead of product mis-selling and negative portrayal of business in the media.

48 per cent said that declining trust in business was an important threat to the success of their own company, against just 26 per cent who said it was not.

This rather skewers the argument that it is somehow ‘anti-business’ or ‘the politics of envy’ to want to address dysfunctional and disproportionate levels of executive pay. Sensible commentators, including plenty on the political right, have argued that reducing top pay to the point that, say, a FTSE 100 Chief Executive has to work for a week – or even a whole month – to earn the average UK worker’s annual salary, rather than just two days as is currently the case, is a necessary pre-condition for the kind of stable society not riven by bitterness and division that business needs in order to flourish.

Our survey findings suggest that beyond the boardrooms of Britain’s biggest mega corporations, most businesspeople themselves agree with this assessment.

The Labour Party’s economic policy paper ‘A better plan for Britain’s Prosperity’ released last month contains some sensible measures for making big business more accountable over top pay: putting elected workforce representatives onto the company ‘remuneration committees’ that set top pay, and forcing investment funds who control shareholdings on behalf of ordinary savers to disclose how they vote when pay policy is put to a shareholder vote.

Recent research from the TUC found that the average pay for a ‘RemCom’ member is around £450,000, roughly 16 times the UK average. It is hardly surprising that these people have become quite cavalier about pay increases amounting to tens or even hundreds of thousands of pounds for directors who already earn millions. A reality check from ordinary workers who won’t accumulate that amount of money over their entire lifetime might encourage a more frugal use of company funds.

Similarly, the TUC found that over a third of RemCom members are themselves executives of other companies whose own pay is dictated by wider executive pay trends and are thus incentivised to wave through huge pay increases for other business leaders, while the fund managers who vote on executive pay policy on behalf of shareholders once it has been finalised by the RemComs also benefit from a culture of high pay.

Executive pay is essentially a market where the seller sets the going rate using someone else’s money. This is a view as likely to be expressed in Moneyweek as in the Morning Star and corresponds with that of Institute of Directors members. Therefore, the howling of vested interests and misguided free-market fundamentalists that it is ‘anti-business’ can be safely ignored.

Luke Hildyard is a contributing editor to Left Foot Forward

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