High Pay Centre Director Deborah Hargreaves writes for the Oxford University Said Business School on the reputational consequences for businesses awarding excessive pay packages
The debate about the unwarranted levels of pay for senior executives has seen a dramatic shift of late. No longer can critics be dismissed as anti-capitalist and anti-business. Simon Walker, head of Britain’s Institute of directors, a group that has championed the business sector since 1903, recently weighed in: “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.”
Walker is hardly a campaigning anti-capitalist. He is avowedly in favour of free enterprise and defends the rights of the business community at large; however he – like others in the corporate sector – has lost patience with excessive pay awards to top bosses, especially when they are not linked to company performance.
Public debate around bosses’ and bankers’ pay has increasingly turned toxic, undermining the reputation of business to the point that some corporate leaders fear it could challenge their licence to operate. As Mr Walker put it: “When the ordinary, hard-working people who are the workforce, customer base and often shareholders of our companies see value destroyed in scandals like Libor fixing, or the collapse of HBoS, they are shocked. When those who oversaw disasters get multi-million pound payoffs rather than public censure, they are horrified and angry. And rightly so.”
However, it is not just rewards for failure that incense public opinion. With the bosses of our leading companies in the FTSE 100 paid on average £4.8 million, a huge gap has opened up between those at the top and everyone else. The average chief executive’s package, which includes bonuses, incentives, perks and pensions, is 185 times average wages across the economy as a whole.
What’s more, CEO pay has been rising at a sharp rate – it has trebled in the past decade – when the workforce has seen living standards squeezed as pay rises have been unable to keep up with inflation. If the minimum wage had increased by as much as CEO pay since its introduction, it would be £19 an hour instead of £6.19. The disparity between top rewards for those in the corporate elite and a squeeze for everyone else, has offended against the public’s sense of fairness. It has also raised doubts about the credibility of our business leaders in general. The Edelman Trust Barometer, which polls 31,000 people in 26 countries annually, found this year that only 18 per cent of the public globally trust business leaders to tell the truth.
Lord Tugendhat, a Conservative peer and chancellor of Bath University, spoke out against excess business pay in his founder’s day Lecture in March. He particularly chastised business leaders who argued against increasing pay for the workforce in general while they saw their own rewards rise by 10 per cent last year: “The country needs its business leaders to speak out in the interests of their companies and of business. But when their pay and pay increases so far outrun those of the people who work for them and the population at large, they lose moral authority, their words will be discounted and the business case on economic and social matters will go by default.”
It is vital that the public trusts business to lead the economy out of the recession and build sustainable jobs for the future. Those who work for our big companies know that they are contributing to the success of that business, yet they are struggling to pay their bills while working longer hours. At the same time, government lauds those at the top as wealth creators who must be rewarded handsomely in case they leave the country.
Trust evaporates rapidly, takes a long time to rebuild, and this requires far-reaching culture change. With the economy still weak, there is a threat of social unrest unless bosses and workforce pull together to create economic growth and jobs. The high-pay culture of our leading businesses must be addressed before trust in the sector can be rebuilt.
This means tackling the way pay is set opening up remuneration committees that set CEO pay to elected representatives of the workforce, scrapping bonuses that are not linked to performance of the overall business and challenging companies to reduce their pay ratios. It will not happen overnight, but is vital to preserve the public’s faith in our business sector.