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Maximum Pay Ratios

HPC Director Luke Hildyard's essay published by Autonomy and Verso in 'The New Economy Starter Pack'. Why it's time to rethink income, not just at the bottom of the ladder, but at the top too.

We already have a minimum wage and we should have a maximum pay ratio too. People want to live in a fairer society without huge gaps between those at the top and everybody else. The vast sums of money that many big companies lavish on a handful of their senior staff (usually by pay committees stuffed with other executives, who all benefit from the same culture of unequal pay) could be used far more productively.

Levels of inequality in the UK are amongst the highest in the developed world. We are the eighth most unequal of 38 countries in the OECD group of advanced economies. In this sample, it is mostly much poorer countries like Turkey and Lithuania that are even more unequal than us. The countries that do better by most measures of prosperity, like Sweden or Denmark or Germany, also have a smaller gap between rich and poor, emphasising the link between equality and public health or levels of crime.

Though very high by international standards, overall levels of inequality (looking at gaps between the top, the middle and the bottom) have actually remained relatively stable since the early 1990s, after big increases in the 1980s. But those at the very top have continued to pull away from everybody else. After a slight fall during the financial crisis, the share of total incomes going to the richest 1 per cent has now begun to increase again. The ‘one per cent’ take nearly 15 per cent of total income, according to research from the University of Essex. It was only about 6 per cent in the late 1970s.

The difference between 6 per cent and 15 per cent of incomes amounts to billions of pounds. Getting that money off the 1 per cent and into the pockets of everybody else is critical to raising living standards. At the High Pay Centre, working on issues of top pay and inequality, we hear a lot of witless clichés about ‘the politics of envy’ or how ‘you don’t make the poor richer by making the rich poorer’. This is demonstrably false. Redistribution has always been an effective way of improving the incomes of those at the bottom. Successful historical examples of making the poor richer by making the rich poorer include the introduction of the minimum wage, progressive taxation or expansions of trade union rights.

A maximum pay ratio, preventing companies from hiking pay levels for their executives beyond a fixed multiple of their workers’ pay, would have a similar effect. It would ensure proportionate pay rises at all levels and incentivise bosses to do more for their colleagues.

The public recognise this. One recent poll found that when asked whether they’d prioritise faster growth or reduced inequality, 68 per cent of respondents chose the latter. Similarly, 77 per cent of respondents agree with the proposition that the pay of top executives should be capped versus 21 per cent who said companies should be free to pay what they want.

So while much of the media treat laissez faire economics and the lax regulation that accompanies it as an immutable and non-negotiable fact of life, people in the real world are much more open to government regulation of private companies in the wider public interest.
Therefore, a maximum pay ratio not only makes socio-economic sense, it is also politically popular. So how could it be implemented in practice?

Rather than a single fixed ratio applied across the entire economy, a more flexible solution might initially be preferable. This would involve addressing pay ratios as part of a broader industrial policy reform aimed at improving the UK’s lamentable record on productivity. Such policy would be overseen by a newly-created government department for employment or work. The issue of work quality is currently neglected by the Department for Work and Pensions, dealing mostly with social security, and by the frequently renamed Business department, which conflates the interests of ‘business’ with those of ‘business leaders’.

The key vehicle for resetting assumptions about high pay would be the creation of stakeholder governance councils. Council membership could be drawn from the relevant trade unions and employer associations, and from consumer and civil society representative groups. The councils would be given responsibility for setting pay ratio limits for each sector, alongside broader oversight of pay bands and training and qualification processes.

In addition to setting a maximum pay ratio in the sector, the stakeholder councils could outline expectations in terms of qualifications and pay levels throughout the industry, including for senior executives. It is striking how candidates for low and middle earning jobs in industries like construction, manufacturing, catering or retail (rightly) have to demonstrate recognised qualifications and certifications, whereas the executives overseeing them are appointed on subjective judgements regarding their ‘experience’, usually as part of a highly opaque recruitment process.

This is weirdly under-discussed, given the UK’s poor productivity record and the likely effect that bad management has in exacerbating it.

Indeed, poor productivity is something of an inconvenience for the lobbyists hired to defend levels of high pay. The chief argument against a maximum pay ratio relates to the supposed difficulties of filling senior management roles that would result from lower remuneration. This assumes that the executive class responsible for a lamentable productivity record, flat economic growth, amongst the worst inequality in the developed world and countless corporate scandals are so uniquely talented and irreplaceable that the country would fall apart without them.

That is a dismally negative outlook, sadly hegemonic in business and the business media. It fails to countenance the possibility that, with the right support, training and opportunities, many people have the potential to fill these roles – never mind the notion that democratic, consensual, non-hierarchical alternatives to workplaces run by dictatorial management figures might exist.

The pace of change to this 19th century approach to business has been far too slow. A maximum pay ratio would help end this draconian mindset, sediment equality into the economy and give the UK a much needed pay rise. It’s time to rethink income, not just at the bottom of the ladder, but at the top too.

Posted on 5 November 2019

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