From the TUC

#Blogaction14: Executive excess – mind the pay gap!

16 Oct 2014, by in Economics

Blog Action Day 2014Britain’s top directors are paid too much in relation to their own staff. That’s one of the conclusions of Executive Excess, a new TUC report that will be launched tomorrow. The highest ratio between the pay of a top company director and average employee’s pay at the same company is 1,607:1. At the other end of the spectrum, the lowest ratio of 3:1 demonstrates that high pay differentials are not inevitable under modern capitalism and that a more equitable distribution of company awards is perfectly possible.

Why does this matter? High pay gaps within companies overvalue the contribution of those at the top in relation to other company workers, which can damage employee morale and motivation. It can also make it harder to achieve pay settlements with staff, who will understandably feel aggrieved when pay restraint for ordinary company workers goes hand in hand with pay rises for company directors. And research clearly shows that companies with high internal pay differentials do worse on range of performance measures, from productivity and product quality to overall firm performance.

At the same time, high pay gaps within companies contribute to inequality across the economy as a whole. The damage to social cohesion caused by inequality has long been recognised; but there is also increasing acceptance that inequality causes serious economic problems too. The lack of real earnings power of those at the bottom compared with those at the top contributes to housing bubbles, unsustainable levels of personal debt and acts as a barrier to recovery in times of recession. The social effects of inequality hardly need spelling out; we are in danger of creating a two-tier society, where the divisions created by vast differences in income are so great as to threaten the bonds that hold us together.

It has long been recognised that companies have responsibilities in this area. For nearly 20 years, companies have been required to take into account pay and conditions of other company employees when setting directors’ pay. Unfortunately, this provision has been roundly ignored; the vast increase in the gap between directors’ pay and average employee pay over this period speaks for itself.

Companies are also required by law to report on how they have taken employee pay into account when setting directors’ pay. But the vast majority of companies pay lip service to this in their reports, at best issuing bland statements that they have considered employee pay, without showing how they have done this.

This report seeks to fill this gap and set out directors’ pay in the context of average staff pay in their own companies. But company reporting on employee pay is so poor that it is very difficult to calculate accurate figures for average employee pay from annual reports. For this reason, the TUC wrote to every company covered in the report and invited them to submit accurate data on average employee pay for us to use. We received responses from 39 companies, which varied widely in their content. A few companies provided information on median employee pay, which was what we had requested, while others provided information that enabled us to calculate a more accurate figure ourselves. Some provided contextual information about where their staff worked; and others simply said they were happy for us to use the information provided in their annual report. All relevant Information provided by companies is included in the report, clearly indicated in footnotes to the tables.

The report calls for a range of measures to tackle excessive executive pay, including worker representation on the remuneration committees that set directors’ pay. It also calls for mandatory standardised disclosure of employee earnings in company reports so that workers, unions, shareholders and the public can judge for themselves whether remuneration committees are living up to their obligations to take employee pay into account when setting directors’ pay.

Narrowing the income gap between top and bottom has become increasingly urgent, and we need to make this an issue that politicians can’t ignore. This Saturday 18th October, thousands of people will be marching on the Britain Needs a Pay Rise march and rally. Hope you can join us!

One Response to #Blogaction14: Executive excess – mind the pay gap!

  1. Brendan Caffrey
    Nov 21st 2014, 3:14 pm

    Pay Inequality: What to do?

    Bank bonuses can now be a maximum of 100% of annual pay, or 200% if shareholders agree. The Chancellor of the Exchequer’s attempt to have this European Union regulation set aside has just failed. There is now an attempt to simply increase annual salaries of directors, with “allowances”. These “allowances” are paid in addition to basic salary and bonuses. The European Union has just ruled that these “allowances” are in breach of the bonus size regulation. This is no surprise!

    The simplest way to get around these regulations would be to increase basic salaries. But this would make pay “packages” simpler to understand, as there would be no bonuses and no “allowances”. Further, the distance between the lowest paid bank workers and the highest paid directors would become more transparent. All this might increase popular and political objections to the exorbitant pay levels of those at the top of the banking industry.

    In 1997 chief executives in the FTSE 100 were paid 47 times their average employee. In 2012 this rose to 133 times the average employee. Given the average wage is now around £25,000.00; this produces a figure of over £3.3 million per annum for the chief executives. How can this distance of 133 from the top pay to the bottom be reduced?
    Some relationship between pay increases at the top, and those at the bottom, needs to be introduced. This could take many possible forms. Say a figure of 5% was an annual increase at the top; then a similar 5% should be added to the bottom. This might stabilise the 133 relationship between the top and the bottom. Pay increases at the bottom of 5% would, however, be well above inflation and very welcome. But the distance from top to bottom would not change very much.

    A more effective possibility would be where companies award directors a bonus of 200% of basic salary, with shareholders support, then those at the bottom should get double their previous increase. If the previous increase was say 5% , then it would rise to 10% of basic pay. The previous stable relationship of 133 to1would now be lost. This might create a fear of inflation as well. But there might be an increase in the perception of this system as more fair.
    More radical options include pay freezes. Pay freezes for all; or pay freezes only at the top, to allow the 133 to 1 relation to progressively fall over time. Or where bonuses of some sort still exist, replace percentage rises with sums of money. These sums could be defined variously as related to length of service; to between 3 and 6 months pay; to one’s position in a company hierarchy; to be being set by a remuneration committee for all employees, with union representation on all such committees.

    None of the above schemes radically reduces the figure of 133. Indeed, 133 could rise. Further, none have any chance of implementation without popular support, and political will. A final objection is that those on low pay and zero hour contracts would become even more attractive to companies.

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