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How We Can Tackle the UK Pay Gap

09/06/2014 16:00 BST | Updated 06/08/2014 10:59 BST

The IMF endorsed the UK's economic recovery on Friday, but it highlights chronic weak productivity as a potential threat to the upswing.

The puzzle of Britain's persistent weak productivity has foxed economists since the recession. But according to respected City economist, Andrew Smithers, the answer is simple: weak productivity is a direct result of the current bonus culture for executives.

He argues that executives are incentivised to buyback their own shares to boost the price, rather than invest in new plant and equipment. That's because most receive hefty pay awards in shares.

Labour is cheap so if companies experience an upturn in demand, they will take on more staff. That has reduced productivity.

If we can reform the bonus culture for top bosses, we could make the economy perform better.

The UK has seen a huge widening of the gap between top and bottom earners in the past 10 years. Recent research from the High Pay Centre shows a 5% rise in CEO pay last year alone, at a time when average wages barely inched above inflation.

That means a CEO now earns more in three days than an average employee takes home in a year, as our recent video shows.

But these huge income disparities are not inevitable. There are ways of tackling the pay gap and it is encouraging to see some forward-looking companies adopting them.

TSB, the bank that is being spun out of Lloyds, recently announced it was introducing a John-Lewis style pay scheme that offers a company-wide profit share. It is also adopting the successful retailer's ratio whereby the most highly-paid executive cannot exceed 75 times average pay.

This might sound unambitious and the boss of TSB could still be paid £1.7 million which is a huge amount. However, it is lower than at other banks and the rest of the workforce will share in the success of the company.

The pay ratio for top bosses is 160 times average earnings so a 75 ratio is certainly a step in the right direction.

We also need to link bonuses and executive incentive plans to long-term targets such as improving investment rather than short-term share price gains. The High Pay Centre is currently conducting a project to try and find ways of better linking pay to performance.

We need more companies to reform pay if we are to make any attempt at tackling income inequality and making the economic recovery more sustainable.