Executive Pay A Threat To Business

Those supporting sky-high executive pay have long argued that it is not only a necessary evil, but also part of ‘how business works’. For the rest of us on planet Earth, soaring executive pay has been much harder to swallow, especially when so many have seen their own wages stagnate or even fall in recent years.

The good news is that this is no longer an issue that can be dismissed as a concern of minimum wage workers and the chattering classes. In an interesting report published by the High Pay Centre today, polling of the Institute of Directors membership found 52 per cent of respondents identified ‘anger over senior levels of executive pay’ as a threat to public trust in business. Moreover, 48% either agreed or strongly agreed that falling trust in business was an important threat to the success of their own company, while just 26 per cent did not think it was important.

This isn’t just about high pay at the top; it’s also about poverty wages at the bottom. We’ve talked before of the threat to business of inequality, and particularly pay inequality. When FTSE 100 CEOs are getting 342 times that of a minimum wage worker, it’s hard to breezily wave away public concerns and insist that business leaders are worth every penny.

Only last week, Ross McEwan, head of loss-making RBS handed back his £1M “allowance”. An act of generosity? Contrition? Or an example of someone simply paid far too much? The reality is that high executive pay reflects the bargaining power of a small number of individuals rather than their worth, and the costs of this are paid for by shareholders, other employees, society and the wider economy.

But people are increasingly savvy consumers; not only well informed of companies and their products, but also of their practices. When over 80% of people think the gap is too great between rich and poor, businesses with high pay ratios and astronomical executive pay run a very real risk. What this polling now shows us is that many are not blind to this – that is a good first step, but it is just that. For example, we’ve called before for medium sized companies to be required to have two or more employees on their remuneration committees. But those polled by the High Pay Centre seemed unmoved by the importance of employees in setting executive pay.

If we are to have a balanced, sustainable economy, we need people to trust businesses. For that to happen we need all businesses to adopt pay practices that better reflect effort and value, or at least make a better attempt to justify why those at the top are seen to be worth so much more than everyone else.

John Hood, Media and Communications Manager