Reform Agenda: How to make top pay fairer

By 14.07.14PublicationsSeptember 2nd, 2020No Comments

New report from High Pay Centre outlines policies to tackle excessive executive pay

The Government should consider requiring companies to cap executive pay at a fixed multiple of their lowest-paid employee, according to a new report published today by the High Pay Centre think-tank.

The report notes that since the late 1990s executive pay has grown from 60 times that of the average UK worker to nearly 180 times and that more radical action is needed if the gap between top bosses and everyone else is to return to more proportionate levels.

Last year the Coalition Government gave shareholders the power to vote down executive pay policy at company AGMs if they thought the proposed pay package was too large. However, every vote at a FTSE 100 company has seen a majority of shareholders support the company policy on top pay. In 2013, pay received by the average FTSE 100 Chief Executive increased to £4.7 million, up from £4.1 million in 2012.

The High Pay Centre argue that the perception of an executive elite reaping all the rewards from economic growth is damaging trust in business, while the threat of widening inequality could also cause political and economic instability. Polling suggests that 78% of the public would support a maximum limit on the amount the highest-paid employee of a company can be paid in relation to the lowest-paid, with just 13% opposed.

High Pay Centre Director Deborah Hargreaves said: ‘It’s time to get serious about tackling the executive pay racket. The Government’s tinkering won’t bring about a proper change in the UK’s pay culture. We need to build an economy where people are paid fair and sensible amounts of money for the work that they do and the incomes of the super-rich aren’t racing away from everybody else.

A maximum pay ratio would recognise the important principle that all workers should share in a company’s success and that gaps between those at the top and low and middle earners cannot just get wider and wider. The idea must now be properly debated.

Though a vote in Switzerland proposing a maximum pay ratio of 12:1 between the highest and lowest earners was defeated last year, UK companies John Lewis and TSB have already adopted a less radical 75:1 ratio. The High Pay Centre note that different ratios could be applied to different sectors, based on the advice of businesses, employees and academic experts.

The report also proposed:

  • Representation for workers on company boards and the ‘remuneration committees’ that set executive pay, as well as on city pay regulators.
  • A national ‘inequality target’ based on previous legally-binding commitments to reduce child poverty and carbon emissions
  • Compulsory profit-sharing, so that if a company does well and the CEO receives a large bonus payment, ordinary workers also receive a windfall.

Notes to editors:

  • The Business Enterprise and Regulatory Reform Act (2013) empowered shareholders with a binding vote on Companies’ executive pay policy.
  • The Coalition Government have also introduced new regulations requiring companies to compare salary and bonus increases to those of their wider workforce
  • However, total pay received by CEOs in 2013 increased from £4.1 million to £4.7 million between 2012 and 2013 according the Manifest/MM&K annual survey of executive pay – .
  • The High Pay Centre have argued that the requirement to compare CEO pay increases to the pay increases of ordinary workers does not represent a fair comparison, because companies are allowed to exclude the largest components of executive pay. Analysis suggests that many companies are exploiting loopholes to ignore the requirement.
  • A number of critics from different backgrounds have called for major reforms to reduce top pay to a level closer to low and middle-income earners. French academic Thomas Piketty who says that pay for ‘super managers’ is driving rising inequality while City economist Andrew Smithers argues that pay packages tied to share price and short-term profitability encourage bosses to cut costs and investment to economically dangerous levels
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