Capping CEO pay is the best way to make the UK more equal

By 01.09.22BlogSeptember 21st, 2022No Comments

It could mean a fairer society and a pay rise for millions of people. Luke Hildyard writes for the I.

There are two factors that determine living standards within an economy, broadly speaking. How much wealth there is overall, and how it is shared across the population. On a per person basis the UK is actually doing increasingly badly in terms of overall prosperity but relative to most other countries we are definitely still very rich. However, we’re also extremely unequal, with worse income inequality than every EU country except Bulgaria, according to the OECD.

The prospects of this situation markedly improving are not good. New research published on Monday by the High Pay Centre and the TUC found that the pay of the median FTSE 100 CEO jumped 39 per cent, nearly £1 million, from £2.5m in 2020 to £3.4m in 2021. Profits of Britain’s biggest companies are up 34 per cent on pre pandemic levels. The wealth of the 20 richest UK households on the Sunday Times rich list increased by £30 billion between the 2021 iteration of the rich list and the 2022 version.

Meanwhile four out of 10 Britons say they have had to choose between spending money on food or heating in recent months.

So we have a situation where there are a small number of obscenely rich people with vastly more money than they need while almost half the population is struggling to meet the cost of bare essentials. It really ought to be completely clear that re-directing money from one group to the other is crucial to our efforts to get out of the ongoing social and economic crisis.

The CEOs covered by the High Pay Centre/TUC report are often the colleagues of working people who are relying on food banks and in-work benefit payments. Roughly one third of CEOs at FTSE 350 companies are paid 100 times more than their lowest earning employees. So well-targeted employment rights and corporate governance reforms that get big employers to distribute pay more evenly could have a big impact on incomes and living standards for low and middle earners.

One such mechanism could be a statutory wage cap at the top complementing the minimum at the bottom. With some companies spending in excess of £20 million on just their executive teams, a cap in the low hundreds of thousands would save companies vast sums of money that could be used to support pay increases for thousands of lower earners. Research from the High Pay Centre and Autonomy found that if the value of all UK earnings over £200k were redistributed, it could fund a median pay rise of £1,400 for over nine million workers.

The arguments against this usually revolve around the importance of top executives to companies and the UK economy. If they were forced to pay mere hundreds of thousands, rather than millions, for their senior managers, they would struggle to attract and retain supposed top talent, business performance would collapse and the economy would suffer, apparently.

This theory relies on the assumption that there are a finite number of people capable of being a business executive, and that everyone else is too incompetent.

It’s a pessimistic view of the 99 per cent of the UK population, and also seems implausible. It is further undermined by the fact that doctors and surgeons, top scientists at elite universities, Generals in the British Army and the leaders of charities carrying out vital humanitarian work around the world all doing critical, highly skilled work for a fraction of the pay of CEOs. There’s no reason why the challenging, stimulating and high-status work of running a business needs to be any more incentivised to attract top quality candidates.

Therefore, we can be confident that the negative consequences of capping executive pay would be minimal, and the main result would be a fairer, happier and more prosperous society.