It’s Time to Rein in Executive Pay

It’s hard enough for most of us returning to work this week, but it’s made harder when you see new figures today that show the huge gulf in pay between CEOs and ordinary workers.

By this afternoon, after just 22 hours of work in the New Year, the typical FTSE 100 chief executive will have already been paid £27,645: the entire annual salary of the average full time worker in the UK. It’s even worse for minimum wage workers: by our calculations they’ll toil the whole year to earn the £12,713 that chief executives pocketed even before the end of the first day back at work.

Most of us will have familiarised ourselves with the concept of excess over the past two weeks, but even so, it seems hard to justify some of the salaries received by the country’s best paid bosses. The typical FTSE100 CEO was paid £4.96m last year. We hear a lot about companies having to offer competitive pay deals to secure and retain executive ‘talent’. But can bosses really be working 180 times as hard as the average worker in this country? Are they really worth 390 times someone on the minimum wage?

Some believe this is simply the result of a well-functioning market, and that such high pay is just rewards for high CEO productivity. But this is a difficult claim to back up. Evidence in fact suggests luck is a strong determinant of CEO pay, with one study showing that external factors that influence a company’s worth (like oil prices) can benefit executives’ pay packets even though they have no control over those factors. What’s more, it found that in cases where a company was unlucky, pay fell to a lesser extent than CEO rewards increased for being lucky. All this suggests an upward trend in CEO compensation due to factors beyond an imagined exponential increase in their productivity and value.

All this clearly matters. When millions of people are poorly rewarded for their hard work, while those at the top carry on raking it in regardless of performance, it’s inevitable that people will feel disillusioned and disconnected from those they work with. Recent polling by the CIPD warns of the demotivating effect on workers of excessive executive pay, with 71 per cent saying bosses’ pay is too high and 59 per cent feeling directly demotivated by it. When you consider more than half of the membership of the Institute of Directors identified ‘anger over senior levels of executive pay’ as a threat to public trust in business, it is clear that such inequality provides a serious business risk.

This fracturing of relationships goes beyond the workplace. When incomes stretch out and inequality grows, it becomes far harder for people to understand and appreciate the lives of others. This harms us all.

The good news is that organisations like PayCompare are doing a great job at publishing pay ratios, to increase transparency on excessively high executive pay. But we need the government to require medium and large companies to release that information clearly so we can all be better informed. Failing that, a bit more common sense on pay setting wouldn’t go amiss.

Lucy Shaddock, Policy & Campaigns Officer