Inequitable distribution of income has severe consequences.

The Post Office scandal has once again exposed the shortcomings of performance related pay for company directors. The company had remuneration committees staffed by hand-picked obedient non-executive directors. None opposed the rewards accruing from wrongful prosecution of more than 900 subpostmasters and dutifully rewarded directors. Paula Vennells, chief executive from 2012-2019 picked up bonuses of £2.2m for wrecking lives.

Performance related pay has boosted the remuneration of directors even when performance is negative, as exemplified by the 2007-08 financial crash, collapse of Carillion, BHS, London Capital and Finance, Patisserie Valerie, Debenhams and others.

The bottom line is a key feature of most performance related remuneration schemes. The median tenure of a FTSE100 CEO is about 3.75 years and temptation is to grab higher pay in the shortest possible time. Profits can be boosted by depressing wages, dodging taxes, postponing repair and maintenance; cutting investment and spending on innovation; and by using novel accounting practices. Directors are rewarded for such tactics as shareholders chase short-term returns. Little attention is paid to the long-term damage and social cohesion.

Workers invest their brain, brawn and life in companies but have become just another disposable commodity. In the words of former US President Abraham Lincoln: “Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration.”

Instead, labour is under relentless attack through fire and rehire policies, zero-hour contracts, anti-worker laws and real wage cuts championed by the state.

Labour’s share of the UK gross domestic product (GDP) has shrunk from  65.1% in 1976 to around 49% in September 2023. The median wage is £29,600 and the average real wage has hardly grown since 2005. Despite all the welfare programmes some 14.4m people live in poverty. 6m people – or 4 in 10 people in poverty – are in ‘very deep’ poverty, with an income far below the standard poverty line. 3.8m people, including 1m children, experience destitution (where they could not afford to meet their most basic physical needs to stay warm, dry, clean and fed). Earnings are so low that 38% of the claimants of Universal Credit are in work. People reply upon foodbanks and charities to make ends meet. Life expectancy is shrinking and premature deaths are rising.

At the other end of the social spectrum bosses of the UK’s biggest companies collect more in three days than what the average worker collects in a whole year. The FTSE100 CEO average annual pay of £3.81m or £1,170 per hour is 109 times the pay of the average worker. Does s/he work 109 times harder? Is it not part of their normal job to increase sales, develop new products, innovate and invest in productive assets and take care of the environment? If it is, then why are they paid bonuses for doing their normal job? They get paid for inflicting social harms too.

The chief executive of gambling company Bet365 got a pay packet of £221m and dividends of £50m whilst society struggles with gambling addiction, broken homes and mental health problems arising from the company’s trade. Sainsbury’s CEO got a pay-packet of nearly £5m whilst most of its workers hover around £12 an hour and many survive through foodbanks and social security benefits.

On the back of soaring worldwide energy prices and profiteering, the pay package of Shell‘s CEO increased by 50% to £10m. Energy giant BP’s CEO picked up £10m even though hig energy prices increased inflation, cost-of-living crisis and poverty. British Gas CEO got a remuneration package of £4.5m even though the company’s profit hike has little to do with any additional investment or effort.  The company also increased its profits by forcibly fitting prepayment meters in the homes of vulnerable people and forcing them to pay higher prices. British Gas CEO felt compelled to say: ‘I can’t justify my pay of £4.5m’. Water companies in England have long inflated profits by dumping sewage in rivers, not plugging leaks, dodging taxes and low levels of investment. Their executives have picked up over £25m in bonuses in the last decade. Care homes, funded by public money, have profit margins of 30%-40% which boosts profits and dividends. Most of the staff is on low wages, resulting in high staff turnover and poor quality of service. Meanwhile, the pay of directors has doubled and some directors receive 120 times more pay than front line staff.

Inequitable distribution of income has severe consequences. Millions struggle to have access to good food, housing, education, pension and other essentials. Inequalities are a threat to democracy as the rich are able to control media, buy lobbyists and fund political parties to advance their interests, to the exclusion of the vast majority of the people.

Any suggestion of controlling excessive executive pay and securing equitable distribution of income leads to the claim that someone works harder or has taken risks and therefore deserves more. Even if that is true, the distribution of income cannot be a private matter as it has social consequences and affects the quality of life of employees, their families and other stakeholders.

Shareholder-centric model of corporate governance has failed to curb undeserved executive pay, or secure equitable distribution of income. As wealth is produced by co-operation of a variety of stakeholders, a stakeholder model of corporate governance is needed.

All large companies must have employee-elected directors. In banks, insurance, water, energy, rail and other companies where customers can be identified with certainty, subject to a qualifying criteria e.g. customer for one year, they too should elect directors so that boards reflect a plurality of interests. Customers (wherever appropriate) and employees must be empowered to vote on executive pay. In such circumstances, directors will not be able to collect higher pay unless employees get it too. Customers would not reward sewage dumping directors and that would change corporate practices.

Company law needs to be changed so that stakeholders can table resolutions at AGMs to impose limits on executive pay. Their vote should be binding, not just advisory as is the case now. Bonuses should only be granted for extraordinary performance, and that should require approval from 90% of stakeholders. Directors should not be allowed to cast proxy votes and swing decisions in their favour.

Inequalities are a form of social pollution and a widely accepted principle is that polluter must pay. Therefore, government must limit tax relief on executive pay. For the purpose of corporation tax, only a maximum of £1 million per executive (or a lower number) should be treated as tax deductible expenditure. This does not prevent companies paying larger sums to directors but reduces the public subsidy. So, if a director receives £200m remuneration, the company can only claim tax relief on £1m. On the remaining £199m it will need to pay corporation tax at the rate of 25%. Of course, companies can avoid it by reducing social pollution.

Quite often, as in the case of the Post Office, years later we learn that directors engaged in nefarious practices to boost their remuneration. Therefore, law must permit clawback of executive remuneration secured in the last decade.

The above is no panacea for addressing contradictions of capitalism but can help to redistribute income, secure ethical conduct, provide foundations for a sustainable economy and enable millions to live a fulfilling life. No doubt, neoliberals that have got so used to exploiting people will oppose democratic reform. Emancipatory change always had to be secured in the teeth of opposition, and reforming corporations won’t be any different. As Winfred Holtby’s novel South Riding on working class struggles reminds us:

“We’ve got to have courage, to take our future into our hands. If the law is oppressive, we must change the law. If tradition is obstructive, we must break tradition. If the system is unjust, we must reform the system.”

Prem Sikka is an Emeritus Professor of Accounting at the University of Essex and the University of Sheffield, a Labour member of the House of Lords, and Contributing Editor at Left Foot Forward.

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