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Are Chief Executives overpaid? Blog by HPC founder Deborah Hargreaves

Author of new book on top pay calls for a new corporate ethos - contact HPC to attend the launch on 11 October

For those of us who care about inequality and pay disparities, these are not encouraging times.

Rarely a week goes by without a new excess. The board at the small online clothes retailer Boohoo is the latest to show that £50m bonuses are not going out of fashion

Successive pay scandals, tax avoidance and unethical behaviour by big business have eroded the public's faith in the sector.

With trust in freefall, a sceptical public is suspicious of company leaders’ motives. It means that warnings from the business community over Brexit were dismissed as “project fear.”

In my view, there is a direct line to be drawn from the way our companies hold down pay for the majority and push it sky-high for those at the top, to the growth of populism, the Brexit vote and the election of Donald Trump.

These were the themes I set out to explore in my new book “Are Chief Executives Overpaid?” which is being launched by the High Pay Centre on October 11. 

The pattern of the past 25 years has seen executive remuneration quadruple while workforce wages have barely kept up with inflation.

While I was writing the book, I thought there were signs the corporate sector might be listening since there was a small respite in the upwards march of top pay in 2016.

But that proved to be short-lived as figures compiled by the High Pay Centre and the CIPD for 2017 show. The average for FTSE 100 chief executive remuneration increased by 23% to £5.66m – there were a couple of large awards that skewed this. But even the median figure rose by 11%. 

This is against the background of the growth in the so-called gig economy for a large part of the workforce where zero hours contracts and self-employment have taken over from guaranteed work.

We have created deep divisions in society between those often struggling to make ends meet and their bosses who are being paid untold riches.

Excessive remuneration for our captains of industry has proved difficult to tackle since investors are conflicted by extremely high pay in the fund management industry.

In my view, we should stop giving executives short-term, share price driven incentives. Performance-related pay which has become the mantra of the corporate world, can produce the wrong sort of behaviour.

We are told that directors need to be incentivised to run the company better and for that, they need shares to have the same impetus as investors.

This does not work well over the longer term. Share price gains can be ephemeral and hard to dissociate from the overall economic climate. It can encourage a share price fixation in executives who should be building companies for the long-term.

I would argue for a new corporate ethos. I believe we are paying our executives to do the wrong things. Shareholders should not be the only beneficiaries of company success and the proceeds of that wealth should be shared more widely.

In the UK, we already have a Companies Act that defines the way a firm should be run. The list of beneficiaries is much longer than just the shareholders and includes employees and customers. Directors need to embrace that outlook and set up structures to achieve it.

One of these could be the inclusion of staff on the board – a move favoured by Theresa May before she lost her parliamentary majority. We need to break open the small clique of mainly male directors who are in charge of companies and introduce more diversity.

We can also change the way we pay our business leaders to move away from shares and stick to cash. This would strip the executive pay package back to its basics.

My book is a call to action for those who value capitalism and free markets. If they aren’t seen to be fair, anti-business sentiment will intensify and we could see the very fabric of our economy undermined.

(To attend the book launch on October 11, contact Luke Hildyard at the High Pay Centre on luke.hildyard@highpaycentre.org)

Posted on 21 September 2018

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