Writing for the Guardian, High Pay Centre Director Deborah Hargreaves asks: Why can’t business leaders work for a salary, like everyone else?
It is no surprise that bonuses were down slightly in the City last year – the shock is that they continue to be paid at all. Many banks have seen their share prices collapse and their reputations shredded in the past year, but bonuses are doled out regardless.
What’s more, the bonus culture has caught on across our economy, with the Office for National Statistics reporting a 12% rise in annual payouts outside the City to £24bn, almost restoring them to the level seen before the economic crisis. In the financial services sector, bonuses were down only 9% last year to £13bn.
Let’s be clear what we are talking about: by far the largest part of this cash pile is paid out to a small number of bosses and managers at the top of our biggest companies. In banking, the rewards are spread around a bit more, but they barely touch the vast majority of employees in branches and behind computers.
Most top bosses can expect an annual bonus equal to 100% of their salary; longer-term incentive plans and share awards take a FTSE 100 chief executive’s package to £4.8m, or 185 times average wages. And it is worth asking what these cash payments are for.
A bonus in most people’s minds should be paid for doing something exceptional, something that is beyond the call of duty and comes on top of the day job. However, for many top earners, bonuses have become too easy to achieve and are almost taken for granted as part of the salary.
Bonuses and incentives are important to motivate and retain top staff, so the argument goes, but the evidence for this is extremely weak. In a survey of 1,100 top executives worldwide conducted earlier this year, PwC found that many valued their salaries more highly than bonuses or incentive plans. Interestingly, the same survey discovered that absolute financial amounts were not as great a motivating force as competition with rivals. Many bosses were happy to take home less as long as they compared well with others and they were prepared to take an average pay cut of 28% for their dream job.
With large bonuses on offer in the boardroom and stagnant pay for the rest of the workforce, the ratio between top pay and everyone else is getting wider, entrenching inequality.
This is even starker for companies operating overseas. The ONS said the mining sector pays the biggest bonuses outside the City. However, little of this will have filtered down to striking mineworkers at Lonmin and Anglo American in South Africa. Lonmin workers ended their strike this week agreeing to a 22% pay rise, taking their earnings to £825 a month, after weeks of bloody dispute.
Big pay ratios within companies have been shown to affect motivation and employee morale. More than that, it is quite obscene for bosses to continue to award themselves big pay-outs when company performance is mediocre, share prices have gone nowhere and staff are being cut (or agreeing pay cuts to preserve jobs).
Inequality is holding back economic recovery. It is not surprising there is little demand in the economy when many are struggling to make ends meet. At the same time, trust in the business sector is plumbing record lows. Business leaders are even looking to the church to help them restore their moral compasses. Part of the answer is in their own pay packets. It is time to get away from the idea that executive pay is some kind of jackpot that bosses have to hit. What is wrong with working for a salary like everyone else?
The High Pay Centre has called for widespread simplification to these complex packages which are hard for everyone – including those on the receiving end – to understand. Performance-related pay should be kept to a minimum and even then paid in shares that have to be held beyond retirement.
It is time for a broader debate in Britain about what is fair pay at the top and across the workforce. If bosses gave up their bonuses would more companies be able to pay a living wage? We have seen rewards channeled upwards for the past 30 years. For the health of our economy and our business sector, it is time to spread them more evenly.