Last
night’s Dispatches on Channel 4 focussed on the state of executive pay in the
UK.
The
programme featured the former Greggs chief executive Sir Michael Darrington “as
he launches a campaign to halt corporate greed. With the country deep in
recession he asks: are we really all in it together?”
The
programme identified a range of problems and a set of solutions. The main problems I felt that it
highlighted were: (i) “inequality in society” (as a more equal society is assumed
to be a happier one), (ii) wanting to avoid rewards for failure, and (iii) the
fact that the lowest paid in organisations sometimes do not receive enough
(e.g. less than a ‘living wage’).
Alongside
these three issues that the programme raised, Sir Michael’s manifesto focuses in on the need to reduce inequality in net pay across society.
To
achieve this he suggests (i) changing the structure of pay as well as its
disclosure, (ii) making remuneration committees have a more diverse
composition, (iii) making AGM votes on pay legally binding, and (iv) making tax
avoidance harder.
I
like the sound of much of Sir Michael’s manifesto - and I get the impression
that his direction is not all that far from the recommendations made in the Policy Exchange report that I co-authored.
However,
I believe that the recommendations he outlines in his manifesto would be more
effective at limiting “rewards for failure” rather than his stated goal of
reducing “the growing gap in net pay, between the highest paid and the majority
in society”.
Let’s
start with this problem with “inequality in society”. When I talk to people in order to understand their opinions
on executive pay, I often find that it is this aspect that is the main concern. For example, if you have no known
ownership of, or employment relationship with, a particular company, but are
still concerned with how much the CEO just got paid … then I suspect that the
inequality issue is your source of concern.
Now
let’s think of ways you might affect the pay of the highest paid in order to solve/improve
the inequality situation. Here I am
specifically talking about inequality of income and not about issues of low pay
at other parts of an organisation (e.g. relative to a living wage benchmark).
Firstly,
all the recommendations made in the programme only focus on pay at those
companies in the FTSE 100. Sure,
through legislation you could dramatically change how these 100 CEOs get
paid…but it is very hard to have a significant impact on all those very well
paid people at non-listed companies. What about all the hedge fund managers, asset
managers, managers at private equity houses, partners at law firms and
consultancies, TV personalities, etc. ?
I am not sure on the numbers, but I suspect that the pay of the 100 CEOs
at the FTSE 100 companies is a pretty small portion of all high pay in the UK. Just consider the pay of the top 100
footballers in the UK for a quick comparison. So if inequality is the issue to tackle, then even
implementing the manifesto fully will sadly fall short of the objective - we will
still have significant inequality.
Secondly
there are two tools for impacting the net income of the highest earners: either
by lowering their pay, or by increasing taxes. The main slant of the manifesto is about limiting the pay
itself, however, we do have the last point about “making tax avoidance much
harder, so that the rates actually paid by wealthier people are higher than
those paid by the less well off.”
My experience is that income tax avoidance is not something that really goes on
at UK-listed companies. If you
want to look at professions where tax avoidance techniques such as employee
benefit trusts are used, then football is a good place to start, with recently
publicised examples here and here.
So I
suspect that closing these loopholes doesn’t really change the net pay of the
highest earners - sure, it will catch a few people, but will it really get to
the heart of the issue?
In
my opinion, if you want to change inequality of income, then the simple way is
to tax the higher income earners more (as well as preventing aggressive
avoidance techniques). Getting
stuck in the detail of executive pay at listed companies just can’t go far
enough in tackling that issue.
