Executive Pay – Social Europe Blog

My latest blog on executive pay levels has just been posted on Social Europe.


On salaries and greed?

As Oxfam reports that the top 1% of the world’s population now ownmore than the other 99%,perhaps it’s time to think about how we remunerate people, and in particular those at the top of the tree, some of which receive eyewatering salaries.

We have to accept this is a big task, but we could start with the values driven businesses, employee ownerships, co-ops and mutuals, and not-for-profits, and follow on with those supplying government and the public sector.

There are a number of reasons for the rush by executives to the top of the salary tree, some of which are quite complex, but whatever the motivation, it is creating an unhealthy society. Whereas in the past individuals became recognised for their status in the community rather than in cash, and for their philanthropy such as Carnegie building libraries, or business people supporting the local football team, now driven people seek recognition through obvious wealth.

This recognition drive is then reinforced by the logic behind Remuneration Committees, which are the method of setting top salaries recommended by the Financial Reporting Council. They employ specialist consultants to survey what others are paying, adjust for industry and turnover, and bingo, arrive at a “market price”. Any executives earning less than this rate get a rise, anyone earning more is left alone as their contract locks them in to that salary. The industry rivals see this change, redo their “comparethemarket” style survey, and the upwards only merry-go-round continues.

This, naturally, has led to an increasing disparity between highest and lowest paid. According to the CIPD, the UK’s mean average salary ratio in the FTse Top 100 is currently 145:1 (top:mean),which is up from last year’s 128:1. Indeed, it has tripled since 1998, and risen fifteen-fold since 1970 when it was much, much lower at around 10:1. As a result, the UK is now reckoned to be second only to the USin executive pay.

There has also been an unwillingness by governments to tax the rich, and we have participated in a race to the bottom to attract the super-rich with ever lower tax rates. In the UK, we’ve seen a reduction in the top rate of Income Tax from an eye watering 99.25% in 1939, which stayed at 98% until 1974, and only dropped below 75% in 1985. In the US they followed a similar pattern as reported herelast month.

This accumulation of private wealth by the rich has also been assisted by the increasing weakness of labour in the employment marketplace caused by the weakening of trade unions and the increase in the number of self-employed, who are largely unrepresented.

We’ve also seen this trend infecting the mutual, co-operative and non-profit movement. This has paralleled the shrinkage of their market share in the UK. The “Co-op” was the UK’s largest grocer in the 1960’s, now it’s the fifth, and falling. Building Societies once had an almost total monopoly on UK mortgage lending, but since the relaxation of Bank of England rules on liquidity in 1980s, their share has dropped to around 25%. Mutual insurers now have only 8.7% of the UK market, as the big names like the Prudential have been de-mutualised. An increasing number of staff and managers are now recruited from outside, rather than home grown, and so haven’t been steeped in the culture of this sector. They may have good commercial skills, but outsiders transferring in lack the understanding of the non-profit difference and have slowly diluted the culture.

One of the changes this has brought about is the idea that senior employees need huge salaries in order to motivate them. Euan Sutherland was paid at a ratio of 330;1 during his 10-month stay as CEO at Co‑operative Group, and this didn’t bring much opprobrium on him or the Remuneration Committee which agreed it, he was criticised for other things. We’ve all got used to high pay.

Meanwhile, different ideas prevail elsewhere. Capping top salaries is already a much more popular policy than is generally recognised. Recent research by Harvard Business School and Chulalongkorn University shows that on average, people around the world think a ratio of 4.6:1 is the ideal. On Nov 23rd, 2014, in one of their regular referendums, over a third of the normally conservative Swiss voters supported a legally enforced overall salary cap of 12:1(top:bottom), for all businesses in Switzerland. The campaign was backed by the Swiss TUC and other social organisations. Even some management consultants agree with the concept of a salary cap; the late Peter Druckerargued that any CEO-to-worker ratio larger than 20:1 would “increase employee resentment and decrease morale.”J Pierpont Morgan, one of the wealthiest men in the world of the early 1900s also thought that this ratio should never exceed 20:1.

In 2015 Dan Price, CEO of Seattle-based Gravity Payments slashed his $1 million compensation to $70,000 and announced he would work towards a minimum wage at the same level for his employees. He raised the minimum wage immediately to $50,000, rising again to $60,000 in Dec. 2016, and $70,000 in Dec. 2017.

The move wasn’t without controversy, both among those who thought his initial remuneration was too high and among those who saw it as a kind of socialist wealth redistribution. Price, however, insists he is not a socialist, and that his actions are based on the values he gained from his strict Christian upbringing.

Another example is the Mondragon Co-operative Corporationin the Spanish Basque country which operates on a set of Principles which are built into its constitution. The top salary ratio is capped at 6:1, and despite, or because of this, they have grown to be the fifth biggest corporation in Spain, and operate the third biggest supermarket chain in Spain, Eroski. Their policies have helped the area rise from the poorest region of Spain in 1956, to being second only to Madrid in 2018, with GDP/capita at €31,776. This compares rather well with poorer parts of the EU – such as Wales’ €21,092.

This is a clear indicator that wage equality policies are not only achievable, but bring wider social and economic benefits in their wake. My view is 12:1 is achievable in the real world right now, and we should start with the non-profits. If their CEOs can’t budget their own lives to live really, really comfortably on almost €250,000, then I’m not sure they are capable of running a large business, and they should go.



Comments are closed.