Economic Theory

Why we should be ‘intensely relaxed’ about high pay again

High pay has been a political concern for more than a quarter of a century, but this concern is growing as we learn more and more about what other people are paid. The political winds have changed: where Labour’s Peter Mandelson was ‘intensely relaxed’ about high pay, the Conservatives’ Caroline Nokes now thinks nobody should earn more than £1 million a year.

The core concern is with CEOs of quoted companies, whose pay has risen dramatically. Surprising numbers of economists allege that this is a consequence of ‘market failure’. Shareholders are said to be prevented from influencing executive rewards, instead determined by remuneration committees and consultants with vested interests in boosting top pay, and nodded through by institutional investors who don’t reflect the wishes of ultimate beneficial owners. It is also often asserted that pay bears no relation to performance.

The evidence on these issues is more debatable than you might think. But even accepting this analysis, what should government do about it?

Since the 1995 Greenbury Report, corporate governance codes have been rejigged repeatedly to try to boost shareholder influence in paysetting, but to little avail. One reason could be that most FTSE-100 shareholders are now overseas investors, less concerned about corporate pay than the Brits.

The latest move is to require companies to publish ratios showing the CEO’s total pay to that of its lower-paid employees, and to ‘name and shame’ high payers who face significant shareholder opposition. This is unlikely to achieve much, except possibly encourage businesses to delist (when they can pay bosses £265 million without any scrutiny, as Bet365 did last year) or to manipulate the ratios by outsourcing low-paid workers.

The limitations of corporate governance reforms have led politicians to propose tougher action, putting workers on company boards for example. At one time Theresa May wanted this, but backed down when faced with business opposition. Jeremy Corbyn has no such qualms: at last year’s Labour Party Conference he sketched plans for all companies (public or private) employing more than 250 to have a third of board members elected by the workforce.

Worker representation on boards in Germany, though, has not prevented companies paying CEOs generously. It may, however, have produced collateral damage as employee representation has slowed restructuring and innovation. With left-wing activists likely influencing the selection of employee reps in Britain, worse might be expected.

Labour also seeks powers to fix maximum pay ratios between highest- and lowest-paid employees of 20 to 1 in the utilities it intends to renationalise, and possibly in firms which do a high proportion of their business with government. To maintain relativities within organisations, middle managers and specialists such as engineers and accountants would also probably have to suffer pay reductions.

Even with Conservatives in government, these ideas are already having an impact on pay in the public sector – and bringing problems. Will Hutton’s enquiry, set up under the Coalition, rejected restricting top public sector pay. But this has happened anyway. We now see universities having to go cap in hand to the superannuated politician running the Office for Students if they want to pay vice-chancellors more than £150k a year, a fraction of what equivalents earn in the USA, Canada or Australia.

Nobody wants public sector pay to rise without good reason, but key jobs must offer competitive rates. The Office of National Statistics is a very important institution; its statistics are a major influence on government policy and business plans, and there is an important task to modernise in light of the emergence of real-time Big Data. Yet the ONS can’t recruit a new boss at the moment as the government is reluctant to increase annual pay beyond its current level of £180k. There may be similar problems in recruiting a new Bank of England governor: pay has not increased since 2013.

Using government power to fix the price of market transactions has been proven again and again to be damaging. In the case of most such interventions, rent controls for example, there may at least be some beneficiaries. Controls on top pay have no discernible benefits to anyone, but do have potentially damaging effects. We should reject them.


Prof Shackleton is the editor, and co-author, of the IEA monograph ‘Top Dogs and Fat Cats. The Debate on High Pay‘.

A version of this article first appeared in City AM

Editorial and Research Fellow

Len Shackleton is an Editorial and Research Fellow at the IEA and Professor of Economics at the University of Buckingham. He was previously Dean of the Royal Docks Business School at the University of East London and prior to that was Dean of the Westminster Business School. He has also taught at Queen Mary, University of London and worked as an economist in the Civil Service. His research interests are primarily in the economics of labour markets. He has worked with many think tanks, most closely with the Institute of Economic Affairs, where he is an Economics Fellow. He edits the journal Economic Affairs, which is co-published by the IEA and the University of Buckingham.

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