Fat Cat Tuesday: Why I’m still intensely relaxed about people getting filthy rich
The High Pay Centre, a pressure group of journalists, trade unionists and superannuated politicians largely funded by the Joseph Rowntree Foundation, has long been a critic of the remuneration of the country’s top executives. It points out that FTSE-100 CEO pay has risen far faster than the pay of the average worker over recent decades. This is certainly true, although the HPC is not above selectiveness in its choice of comparator years, and in this week’s press release arguably misleads by comparing mean CEO pay with median employee earnings.
Why has executive pay risen so much? It reflects increased competition in product and executive labour markets associated with increasing globalisation. No developed country is immune, though the scale of increase may differ. Freewheeling US capitalism has seen even greater boosts to bosses’ pay – but staid Germany, despite its system of supervisory boards and rhetoric of ‘social partnership’ has seen pay increases comparable to those in the UK. Nor are top executives the only gainers from these trends: similar increases in have been seen for top entertainers and sports stars.
The High Pay Centre doesn’t believe top CEOs are worth what to most people are levels of pay beyond their dreams. In some ultimate moral sense, who could disagree? But the reality is that shareholders and the financial markets generally acquiesce in the view that firms have to pay top dollar to attract top talent. When Tidjane Thiam, then Chief Executive of Prudential, announced in March last year that he was leaving for Credit Suisse, Prudential’s shares immediately fell by 3.1% (a fall in value of £1.3 billion). If individuals are perceived to make a huge difference like this, they can expect to be paid a rate which reflects their valuation. Effective CEOs, like top traders or Premier League footballers, may not ‘deserve’ more than a doctor or a teacher or a social worker in some (indeed many) eyes, but it’s not unreasonable that they get a substantial slice of the action.
The unpopularity of high corporate pay led the last government to introduce legislation requiring fuller data to be published on executive remuneration, including a single figure for CEOs summarising their entire pay package including pensions and share options, and giving shareholders a binding vote on executive pay at least every three years.
The High Pay Centre wants more: for example, representation of ‘ordinary workers’ on remuneration committees and the publication of the pay gap between the highest and median earner within companies. The first would likely be a recipe for continuing strife within firms as union activists were given a permanent platform to complain about the unfairness of everything; the latter would be subject to ‘gaming’ as firms strove to manipulate the indicator.
Where would the High Pay Centre really want executive pay to settle? The truth is that it, and other critics of high earners, have never provided a satisfactory answer to this question. Even in the rather simpler case of high pay for public sector bosses, no easy answer was found by Will Hutton’s government-sponsored enquiry in 2011. Expected to recommend a cap on the ratio of top pay to that of the lowest paid, Hutton had to admit that this would create more problems than it solved. Attempts to impose something like this ratio cap on FTSE-100 firms would surely fail as firms restructured, relocated abroad, reverted to private ownership and so on.
Even in the extremely unlikely event that controls could succeed in permanently reducing pay differentials, this in itself would of course do nothing directly to raise the living standards of the poorest. Indeed, if rigid controls on top pay succeeded, the outflow of talent and discouragement to enterprise might well lead to lower average living standards in the future.
It is possible to be seriously concerned about poverty without worrying too much about the rich, or to care about inequality of opportunity without worrying about pay differentials. We already have a hugely redistributive welfare state and tax system and we should be looking to improvements in these often wasteful and confused structures, and to finding ways to encourage enterprise and innovation, rather than focusing on distracting issues about the pay packets of a handful of bosses.
Nevertheless, sadly, you would not bet against the pressure to ‘do something’ about top pay leading this administration, and certainly a Jeremy Corbyn-led alternative, to further legislative meddling. When you also factor in the role of government in setting the new National Living Wage, and seeking to publicise and reduce the gender pay gap (and ethnic pay gaps in due course, no doubt), the politicisation of earnings represents a worrying trend. This trend threatens to test the limits of government administrative competence (as we saw with incomes policies 40 years ago), create continual antagonism within society, and limit personal freedom.
Prof Len Shackleton is a Visiting Fellow at the IEA, and professor of economics at the University of Buckingham.