THE BLOG
04/01/2018 09:29 GMT | Updated 04/01/2018 10:03 GMT

Fair Pay? Some Chief Execs Have Already Clocked Up What It Will Take The Rest Of Us All Year – If That – To Earn

Welcome to Fat Cat Thursday 2018

Andrea Baldo via Getty Images

Here’s a thought to cheer you up as you lurch back into working life this new year: at some point early today the average FTSE100 chief executive will already have earned (or, possibly, “earned”) what it will take the typical UK full-time worker all year to earn. The median full-time UK employee gets around £28,800 a year.

This is “Fat Cat Thursday”, a moment which brings home the vast gap between what corporate leaders get paid versus everybody else.

In the history of modern capitalism the growth of this gap has been a relatively recent development. The banker JP Morgan said he was dubious about lending money to clients where the highest paid executive was getting more than 20 times what the lowest paid employee was getting. Peter Drucker, the management guru, also held that a 20 times pay ratio was the limit of what was tolerable or sensible.

Until the 1980s, this sort of view still held sway. But today’s FTSE100 boss is getting paid 120 times what the average worker (not the lowest paid one) is getting, and in the US the gap is even larger – as much as 270 times, according to the Employment Policy Institute.

In the 1960s and 70s the pay ratios were much tighter, closer to those 20 times levels still considered normal and respectable. Have bosses got so much better since then? Has their job really got so much harder? Does the fact that some of the businesses they work for have got bigger justify the gigantic explosion in pay?

The answers to these questions are, respectively, no, no and no.

Top pay has become a bit of a racket. Self-serving arguments are deployed to justify it – “oh, there’s a going rate you know, this is what the market demands, there’s a global war for talent and very few people are capable of doing these jobs”.

But these argument are flimsy at best and do not survive much scrutiny. A ten year study of corporate performance conducted by the Lancaster University Management School found only a “negligible” link between the mediocre performance of FTSE350 companies and the extraordinary growth in top pay.

The system has been rigged. Base pay has been kept low, artificially so, while what is called “variable” or “performance-related” pay has shot up. This has been disastrous. CEOs have been given an incentive to keep the share price up over the short term to hit “performance” targets. Capital which could have gone into productive investment has instead been used to buy back shares to keep shareholders sweet. Hence the productivity crisis and artificially propped up share prices.

 

The system has been rigged. Base pay has been kept low, artificially so, while what is called “variable” or “performance-related” pay has shot up

 

This is the unintended consequence of two separate developments: firstly, research produced at Harvard Business School in the 1970s which suggested that the “agency problem” – the gap between owners and managers – could be bridged by “aligning” management’s interests more closely with owners through the use of share options. The second development, brought about by the Clinton administration, was to remove tax breaks for CEOs for pay above $1m unless that pay could be shown to be “performance-related”.

Hence share-based CEO pay: a calamity for us all – well, except for the CEOs on the receiving end. The idea that a single human being called a CEO should derive disproportionate credit for the movements in a share price over a short three or five year period is a fairytale too fantastical for the Grimm brothers or Hans Christian Andersen to have contemplated. But this is the fictional foundation on which CEO pay is based.

The UK government has taken some action, requiring large public companies to publish the pay ratio between the top and the average worker. And the Investment Association will now publish a list of companies whose top pay proposals have been rejected by 20% or more of shareholders.

These are welcome steps. It is up to all the players in the top pay game – company boards, shareholders, pay consultants, headhunters – to change their behaviour.

It has taken 20 or 30 years for today’s excesses to be reached. The gaps won’t close in one or two years. But if business does not start and sustain an effort to close these pay gaps then governments, left or right, will feel emboldened and obliged to take further action.

People have had enough, and politicians have to keep up the pressure on business to reform itself. The landlord has announced closing time in the last chance saloon. It’s time this party was declared over.

Stefan Stern is director of the High Pay Centre

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