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High Pay Matters

Ruth Lister on the interim report of the High Pay Commission.

May 22, 2011
5 min read

‘A top executive is currently paid 145 times the average wage.  By 2020 the differential will be 214 times’ on current trends.  This is just one of the shameful facts to be found in the independent High Pay Commission’s interim report, More for Less: what has happened to pay at the top and does it matter? (p7).  Its analysis shows how, between 1997 and 2007/8, the income of the top 0.1 per cent raced away from that of the wider population with an increase of 64.2 per cent.  In comparison, the income of a person in the 50th percentile (half way up the income distribution) increased by only 7.2 percent.

Although those at the bottom did better than under the previous Tory administration, largely thanks to Labour’s more redistributive measures, the bonanza at the top explains why inequality was still higher when Labour lost power.  This is one reason why high pay matters: it is a major driver of pre-welfare state levels of inequality.  But unequal pay matters in its own right too.  As the report explains, what someones is paid ‘is loaded with perceptions about fairness, value, worth, status and much more.’ (p16)  Fair pay, the report argues, thus matters to companies, the economy and society.  ‘Excessive rewards are undermining relationships with employees and shareholders; they are encouraging harmful risk taking and creating an economic elite which wields enormous power but appears to have lost touch with how the rest of us live.’ (p8).  This in turn damages social cohesion and, I would argue, common citizenship.

The report is worth reading, in particular, for its dissection of the self-serving arguments used by those at the top to justify their rewards.  While attempts to link pay to performance have certainly contributed to run-away awards, especially for executives, the report cites research which questions whether pay does indeed reflect performance in many cases.  It likewise challenges the idea that high pay acts as a compensation for unduly high risk in such positions.  It pours the cold water of evidence too over claims that high pay is needed to prevent international poaching of executives.  Moreover, executive pay in the UK is significantly higher than in the rest of Europe.  And although it is lower than in the US the gap is narrowing fast.

Attempts to rein in top earnings hitherto have largely been aimed at strengthening corporate governance mechanisms.  Their weakness is exposed by ‘the fact that boards, remuneration committees and shareholders have failed to tackle the huge growth in pay packages’ (p9).  The report concludes not only that ‘current regulation will not be effective in restraining top pay’ but also that it ‘has even been shown to be a contributory factor pushing it up’ (p9).  As the Chair, Deborah Hargreaves, concludes in her Foreword, ‘existing attempts to rein in top pay have not worked’ (p5).

So what is the answer?  The Commission will be making recommendations in its final report.  It flags up that these will address three main areas: transparency through more publically available information about pay; accountability through strengthened corporate governance; and fairness.

Transparency is, of course, important.  However, isn’t there also a danger here?  The report points to how the ‘growing use of comparator groups has contributed to an “arms race” in pay’ (p14).  And in an article in the Independent on Sunday, Hargreaves observes that ‘many executives use the pay round as a way of keeping score against rivals.  It is often not about the aggregate amount on offer, but about how that compares with others’ rewards’.  Might not more public information about pay simply fuel the ‘arms race’ further?  Certainly, in order to avoid such an outcome corporate governance mechanisms would have to be strengthened significantly and those charged with regulating top pay would need to reflect wider public concern about unfair rewards.

On the question of fairness, the Commission ‘will seek to understand further what is fair pay in a modern corporate environment and consider what reforms could engage greater fairness in relation to pay’.  A key message running through the report is that ‘the exponential increase in pay at the top of the labour market is a form of market failure.’ (p17)  It points to how legislation on, for instance, equal pay and the minimum wage has ‘been brought in to correct or manage the market.’ (p35).  I hope the Commission will now consider parallel legislation to address the market failure of high pay.

One mechanism for doing so would be some form of maximum wage.  This would not necessarily be a single figure to mirror the minimum wage.  But it could establish a maximum pay differential such as David Cameron himself suggested in relation to public sector pay.  In suggesting an appropriate differential the Commission might look to those that pertain in more equal societies.  And, it could usefully instigate research and democratic deliberation to ascertain what the general public would regard as a fair differential.  This would serve both to provide a publically acceptable benchmark and to involve the public in the next stage of the Commission’s important work.

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Ruth Lister is a Labour peer and emeritus professor at Loughborough University.

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