Should shareholders be granted powers to curb executive pay? This week TUC’s Brendan Barber goes head to head with the leading economist at Centre for Policy Studies, Ryan Bourne
When Vince Cable proposed an executive pay cap last autumn there was outrage among the business community. So when the PM announced plans to bring in new legislation that would effectively give powers to shareholders to curb boardmembers’ pay packets, cries could be heard all the way to Lands End.
With this in mind, we thought we’d ask representatives from both sides of the fence to put forward their arguments. So, do superstar CEOs justify superstar salaries?
NO: Brendan Barber, TUC General Secretary
Pay inequalities in the UK are at a record high. While the average wage is around £26,526, the average FTSE CEO takes home £2,711,238.
What’s more, over the last decade top pay has been rising five times more quickly than wages for most employees. And since 2003, incomes for most people have been flat, failing to provide for the rising living standards that the strong economic growth we experienced (at least until the recession) should have brought.
The downturn has made things even worse.
Over the last year nearly all British workers have experienced a significant fall in their real wages (the actual amount they have left once inflation is taken into account), and the Institute for Fiscal Studies has shown that we’re living through the biggest squeeze on household incomes we’ve seen for generations.
But those at the top have been awarding themselves an ever larger share of the economic cake. As a result, the pay gap between executives and their staff has continued to widen despite the persistence of the economic crisis. In 2000, the ratio of FTSE 100 top executive pay to typical employee pay stood at 47:1. By 2007 this has nearly doubled to 92:1. By 2011 it has risen again to 102:1.
“No reputable study has shown that executive pay has been successfully linked to results”
There have been no significant improvements in corporate performance over this period – instead we’ve seen share values collapse as a result of a global recession. No reputable study has shown that executive pay has been successfully linked to results and, as the High Pay Commission has recently shown, salary growth over the last ten years bears no relation to market capitalisation, earnings per share or pre-tax profit.
But the evidence does show that wide pay disparities within companies are associated with lower company productivity. Add to this the wider economic and social costs of inequality and the mounting evidence – documented by the IMF – that pay inequalities made a significant contribution to our recent economic crisis (leading those at the bottom to become dependent on debt, while wealth concentrations at the top led to too many high stakes risks), it’s clear that while runaway corporate pay isn’t bringing us any benefits, it’s creating plenty of costs.
This is why action is needed now to tackle top pay.
Disclosure of pay ratios within company remuneration reports is an idea whose time has come. We also need an employee vote on remuneration proposals to give ordinary workers the opportunity to have their say on executive pay at their own companies. A binding shareholder vote on executive pay, the Prime Minister’s main policy, isn’t a bad idea, but on its own it will have little effect. The problem is that shareholders rarely use the many powers they already have. Since 2002 there have only been 18 cases where pay reports have been defeated at company AGMs – a miniscule proportion of the votes. Instead we need a new approach on the part of shareholders, and measures which make them more likely to act.
There is simply no justification for the UK’s growing pay gap. Of course no-one believes there shouldn’t be fair rewards for those in challenging jobs – but pay inequalities on this scale are not only morally wrong, they are causing economic damage. It’s time to tackle top pay once and for all.
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YES: Ryan Bourne, Head of Economic Research at the Centre for Policy Studies
The past months have seen populist high-pay bashing occurring throughout politics. Spawned by anger at bonus payments for bankers in bailed-out institutions, the politicians from all parties now appear to have widened their nets to incorporate executives of all companies, with the justification for ‘action’ being that their pay is not always reflective of company performance.
Whilst this may be true, it is incredibly ignorant about the way that pay is agreed. Pay is not, and never will be, merely a reflection of performance, but is determined by a host of supply and demand factors. For executives, it will inevitably be linked to the alternative opportunities which individual executives forego, the size of the firm, the type of market in which it operates, and many other factors.
But more than that, performance is subjective.
Shareholders might be extremely happy to appoint a highly paid CEO who helps avoid the company folding, even if the business continues to make significant losses.
“The truth is this debate has been riddled with inaccurate information”
But even if you believe that pay should be inextricably linked to performance, it’s unclear why there has been such a focus on CEOs. The Income Data Services report, which showed that FTSE 100 directors’ pay had increased by 49 per cent over the past year, certainly provided the trigger for debate. But if this was an issue of principle, a range of other industries also pay relatively unsuccessful people huge amounts. Football, film, private equity capital, and many senior local and national government tiers are all well paid, with little link to performance.
The truth is this debate has been riddled with inaccurate information. While overall pay for executives rose by 49 per cent last year, within that base pay rose by just 3.2 per cent and bonuses by 13 per cent. Yes, these figures are still higher than experienced by the rest of us. But what it shows is that most of their increased remuneration was driven by incentive plans and options which are strongly linked with stock-market performance. FTSE 100 earnings per share were up 39 per cent in 2010, and the FTSE 100 went up by 9 per cent in that year. Because performance has to be assessed before payments are made – i.e. there’s a year’s lag – the increased pay in 2011 reflects reward for performance in 2010.
there is little evidence of supposed ‘cronyism’. Manifest, a corporate governance group which carries out regular surveys, recently showed that only 5 per cent of FTSE 100 executive directors serve as non-execs on boards of other FTSE 100 companies and only a small number sit on other companies’ remuneration committees.
As politicians try to make political capital on ‘reforming capitalism,’ we should therefore be wary of the attack on high pay. While more transparency and increased power to shareholders is desirable, current rhetoric risks trying to override market forces in the name of ‘fairness.’ Do superstar CEOs justify superstar salaries? If the shareholders think they are doing a great job, then yes. For it is they, not the public and certainly not Government, who could and should make that judgement.