Growing pay gaps are hurting business
The gap in pay for those at the top and everyone else is now so wide that a leading company boss receives more for three days’ work than an average employee takes home for the whole year, according to calculations by the High Pay Centre, http://highpaycentre.org/blog/fatcat-wednesday-for-ftse-100-ceos.
It would take the same chief executive just over a day to amass more than a minimum wage worker in a year.
And if the average employee wanted to try and match the package of the most-highly paid UK executive, they would have to slave away for more than 600 years. Angela Ahrendts, the boss of fashion company Burberry, took home nearly £17 million in 2012.
Although companies argue that these big packages are important to retain talented bosses, this does not seem to have been effective at Burberry as Ms Ahrendts announced her departure shortly after her pay was revealed. She is off to join Apple in the US later this year.
While average wages have been stagnant for 10 years with the Office for National Statistics reporting that pay rises have not kept up with inflation, chief executive pay has risen by 74 per cent in that time. The gap between top and bottom is growing ever wider.
This is important for social, economic and business reasons. Rampant inequality leads to a range of social problems from higher morbidity to falling social mobility.
But economically, it also doesn’t make sense to channel the lion’s share of rewards to those at the top and starve everyone else of resources. This drains spending power from the economy and fuels a big build-up of debt among those who cannot afford to maintain their lifestyles without borrowing.
The theory that wealth would trickle down from those at the top to the rest of society has been shown to be false. Rising inequality has, in fact, weakened the economy.
Andrew Smithers, the respected City economist, has argued in his book the Road to Recovery, that we will not have a sustained economic recovery without addressing the way executives are paid. He says a focus on share prices creates a short-term corporate culture that does not build successful companies over the long-term. Executives are encouraged to focus on the share price as a large part of their package is paid in shares.
Within companies, big pay gaps also have an effect. Recent research by the High Pay Centre shows that bigger pay gaps lead to a higher incidence of industrial unrest, more work-related illness and higher staff turnover http://highpaycentre.org/pubs/the-high-cost-of-high-pay-unequal-workplaces-suffer-more-strikes-and-higher
It is important to be able to make a case to the business community that growing pay gaps are hurting company efficiency and function, as that is one way to try and convince remuneration committees to restrain pay.
In focus groups conducted by the High Pay Centre, employees are sensitive to income differentials and recognise that those at the top work hard. They believe they deserve to be paid substantially more than the average, yet they believe this ratio should be 8 to 10 times their own earnings. They are usually shocked to hear that the ratio is more than 100 times.
Our research on employee commitment and job satisfaction bore this out. Up to a certain point, employees are motivated by pay gaps; it encourages them to work harder and aim to earn more. However, above a certain point – in our study it was a sample of workplaces where the ratio was more than 24 times top to bottom – the rising ratio becomes counter-productive and no longer spurs employees on.
Barclays has recognised the importance of employee engagement for the first time in its new bonus structure for its top 150 managers. They are now required to reach five targets, one of which, is to improve employee engagement levels from 74 per cent to 91 per cent.
When employees consider large pay gaps within their organisation to be unfair, it can undermine their morale and subsequently, productivity.
Shareholders are starting to question firms about their pay ratios as recognition that large gaps can damage company success begins to gain ground. James Corah, secretary to the church investors’ group, says that there is a strong interest in pay at the bottom of companies and how it relates to those at the top.
The government now requires companies to show in their annual remuneration reports how they have taken account of pay across the workforce in setting executive packages. However, the handful of companies that have so far reported under the new rules have referred to a small number of top managers as a comparison with the executives rather than a broader sample among the workforce.
This is why it is important to maintain the pressure on companies to address growing pay gaps. The public is angered during the annual round of bank bonuses when it sees bankers rewarding themselves richly while everyone else is coping with the fall-out from austerity policies prompted by the financial crisis.
The sense of unfairness has eroded faith in business and damaged the reputation of our corporate sector. Business bodies such as the Institute of Directors recognise this and are urging change. The head of the IOD, Simon Walker, speaking at a High Pay Centre event last year, said: “What has done the most damage to the reputation of business and the free market in recent years? It hasn’t been the G20 protests, or the Occupy tent cities. It has been the greed of those who demand and secure rewards for failure in far too many of our large corporations.”
Deborah Hargreaves is director of the High Pay Centre. She is a former business editor of the Guardian and previously worked at the Financial Times