Want to end wealth inequality in Britain? Cap the bosses’ bonuses

Checking soaring executive pay is necessary for reducing income inequalities, but the government continually fails to address the issue.

Despite some occasional noises from shareholders, fat-cattery continues unabated. All wealth is generated by the collective efforts of all stakeholders, but executives continue to run away with disproportionate share

The chief executives of FTSE 100 companies collected an average pay of £3.45m last year, which is around 120 times the average pay of full-time UK workers.

The chief executive of the Lloyds Banking Group collected £6.42m in 2017, a 10.9% increase from £5.78m in 2016. This is almost 100 times the average pay at former bailed-out bank.

People can’t afford to get on the housing ladder, but don’t worry, the chief executive of Balfour Beatty is doing very well. He picked-up £5.4m for the year to December 2017, compared to £1.5m in the year before.

You really have to feel sorry for WPP’s former chief executive whose remuneration plunged to £13.9m, compared to £70.4m in 2016 and £48.1m in 2016. How is the poor chap going to manage? He certainly won’t be going to any food-bank or worry about paying his rent or mortgage.

BT slashed 13,000 jobs but its chief executive picked-up £2.3m, including a £1.3m performance bonus.

There is no relationship between the long-term performance of companies and executive pay. Directors of some of poorest managed companies, such as Carillion, collected mega pay packets. Despite failed products, the chief executive of Circassia, a pharmaceutical company, collected £825,000 in 2017, around 80% increase on 2016 pay.

Directors say that they deserve more because they increased sales, investment, profits customer base, or some other measure. Isn’t this part of their job anyway? So why the bonus?

Besides, the targets can only be met by the collective efforts of everyone. But the incentive schemes available to executives are not extended to employees.

Effective reform should empower employees, customers and other stakeholders to vote on basic executive pay. Bosses won’t get approval from employees unless workers get a fairer proportion of the wealth they have generated with their brain and brawn. Customers at gas, water, electricity, phone, train, banks and other companies have been ripped-off for far too long and won’t reward executives responsible for giving them a raw deal.

And if bonuses are offered to executives, the same should be available to all employees. After all, no executive can turn in superior performance by himself or herself. The bonus element of executive pay, if any, should only relate to extraordinary performance. It should be subjected to additional scrutiny as too many incentive schemes are too easily contrived.

Approval from 90% of stakeholders, including employees, customers and shareholder, should be required on bosses’ bonuses. Directors themselves should not be permitted to vote on their own remuneration packages.

The government’s previous reforms have done little to check fat-cattery. Business secretary Greg Clark said earlier this year that listed companies would have to reveal the pay ratio between bosses and workers, in new legislation to be drafted “before the summer recess”.

And if 20% of shareholders objected to executive pay package then the names of the executive would be published. Unlike at AstraZeneca, where despite 37% of the shareholders voting against executive remuneration, the chief executive still collected £9.4m.

But the naming and shaming will not be published on a government website. Instead, a register will be set up by the Investment Association – a trade body representing UK investment managers.

These toothless reforms don’t give stakeholders any enforcement rights and would hardly worry executives seasoned in advancing their self-interest.

To induce constraint, government can introduce an extra income tax band for high incomes. It can also impose a limit on the tax deductibility of total executive remuneration whether in cash, share options, shares, benefits or other forms of rewards.

Plus, an upper limit of 10-20 times of the median pay in the company should be fixed. Executive remuneration exceeding that should not count as a tax deductible expense. This means that there is no statutory limit on the amounts that can be paid to executives but the after-tax cost to companies of the mega executive pay packets will be much higher.

There are already a variety of costs either fully or partially disallowable for tax purposes. These include costs relating to entertainment, buildings, company cars and others. So it is a matter of extending that list.

It really shouldn’t be too hard a job for Mr Clark and his team to figure out.

Prem Sikka is Professor of Accounting at University of Sheffield and Emeritus Professor of Accounting at University of Essex. He tweets here.

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