Top executive pay; a broken record close to shattering

fat cat 630

When something sounds like a broken record, it is because the same things keep getting repeated. In the perennial increase in top exec or ‘fat cat’ pay and its growing distance to average full time employees’ pay, we seem to have the perfect proverbial needle getting stuck in the same groove. But how long can this broken record on top exec pay continue, before it shatters doing potentially irreparable damage to business?

An excellent article in Management Today, entitled ‘One Chart that shows why people are angry about executive pay’ highlights this well. The article and chart mentioned in its title (shown below) from pay analysts, the Incomes Data Service highlight how the average FTSE 100 chief executive now earns 120 times more than the average full-time employee. As I outlined back in February, in my Business innovate article ‘Enlightened self-interest; why dropping and stagnant wages matter to business’, research from David Sainsbury showed that in 2006, the average earnings of a FTSE 100 boss were almost 100 times that of an average full time employee. This is up from 25 times more in 1981, to 47 times more in 2000 to around 100 times more in 2006.

But what is astonishing about the Chart, is that despite the global recession (the greatest since the Wall Street depression of 1929) and a downward trend between 2011 and 2013, average FTSE 100 CEO earnings went up by 20 times that of the average full time employee over the recession years. This is despite the fact that at certain points, such as 2013, up to a quarter of FTSE 100 companies did not make a profit, despite only 10% of FTSE CEOs not receiving a bonus.

earners chart

Average full time executive earnings on the other hand has risen just 0.6% year on year in the three months till the end of July. With inflation running at 1.5%, these earnings are wiped out. This is off the back of wage falls for three years between 2010-2013, which saw wages fall to 2003 levels.

When stats such as these are written down, it is easy to see why big business and ‘fat cat’ bashing becomes the sport of shareholders and the media especially in the so called ‘shareholder spring’.

So far, however, big business has not felt the pressure to act in any fundamental way on the growing pay scales of top execs, especially in relation to its growing gap to average earners in the middle and bottom of business. In fact, it is politicians who have taken the lead here in varying ways.

The Conservatives have pledged to move the 40% tax threshold to £50,000 from £40,000 if they are elected to government after the 2015 general Election. This will allow people to take home more pay, increasing their feeling of pay reward, even if their pay in real terms does not increase. Labour has pledged to use funds from things such as banks bonus levy to fund a guaranteed job for young people. This redistributes money from top execs to those lower down to pay for things, again with no real increase to take home pay, but more pay freed up to do other things.

But how long can this scenario of government essentially artificially boosting the impact of take home pay, in a lack of real term pay increases (after inflation) for average full time executives workers continue? Focus has already come onto the use of tax credits for the working poor (those who work, but do not take home enough pay to be able to pay all their costs), with many criticising this procedure as subsidising low pay rates from business.

The point here is not to criticise high earners or pay in business. Many people work extremely hard and are justified in receiving high pay and high reward. It is rather when the link between effort and reward becomes broken.

This is not just directly in top executives justifying the vagaries of stock option compensation, which for many is more about luck than demonstrated effort. It is rather, that there must be a link between effort and reward across the spectrum of work.

Business must be able to show the link in effort and reward and its increase across low, middle and top execs. If not, this link becomes broken and questioned. When low and middle earners’ pay has gone backwards or stagnated, it seems hard to justify an increase of 20 times in the pay gap between top and average workers. As the Management today title says, no wonder people are getting angry.

Noises to change this broken record approach on top executive pay are beginning to be made. For example, Mark Carney, the governor of the Bank of England made this point at the Inclusive Capitalism conference in May, which saw those who controlled $30 trillion of the world’s assets, come together. He said that the world’s business leaders and policymakers need to rebuild the “social capital” on which capitalism is based, including reforming CEO pay.

Business must, though, take a lead on this issue of the gap between top executive pay and the pay of others. This is self-enlightened interest in two ways. It should increase the productivity of those middle and lower earners as Sanjay Sanghoee argues in this Fortune magazine article. It will also stop a tougher external reaction from policy makers, once pressure comes to bear from the public in light of ever increasing gaps and the breaking of the ‘social capital’ that Mark Carney mentioned above. This will see heavy and potentially damaging responses from policy makers, as has been seen in areas such as proposed energy market reform.

What this response from business should be, warrants discussion. Whether this is prioritising the gap in pay as a concern that demands a strong response from business lobbying groups when reported; to specific initiatives to look at the gap – the business community must show it is taking control of the issue. But the narrative that tough trading or market conditions can freeze or stop average executives take home pay, while top execs pay increases regardless of external conditions or profit and loss cannot continue. At some point factors will improve and average pay will start to go up again. But to hold out for this, or use it as an excuse not to tackle the growing pay gaps within business is not enough. To do so risks finally shattering the broken record on top exec pay, with potentially irreparable damage to all business, its image and the pro-business environment; not just those businesses in the FTSE 100.

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About the Author

About the Author: Crispin Oyen-Williams is the Director and Founder of Business Innovate. .

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