18 May 2011
The interim report of the High Pay Commission, published on Monday, focuses attention – yet again – on the fundamental issue of fairness in modern workplaces. The report highlights the growth in top people’s pay relative to the rest of the workforce and argues that this widening gap is ‘ultimately a form of market failure’.
At the core of its analysis, the Commission attributes much of the growth in executive remuneration to ‘attempts to link pay to performance’, and argues that this link is regarded with scepticism by many and that it too many cases the results are inflated CEO pay rather than high-octane business performance.
Reading through the report – and having spent some of my time in the last few months supporting the work of Will Hutton’s Fair Pay Review – I had a number of reflections on how these issues are being debated in the post-‘crunch’ era.
First, one of the very important points made by Will in his Review is that, however imperfect, we are talking about a ‘labour market’ here. We might not like the salaries being paid to Premiership footballers or FTSE 100 CEOs, but they reflect a basic set of market forces which – for better or worse – take into account a range of factors (reputation, risk, stock market expectations, globalisation, the politics of remuneration committees etc). As Will points out, the package of a CEO is made up of their base pay, reflecting the core accountabilities of their post, and different forms of variable or contingent reward which reflect the contribution or ‘added value’ which they make as individuals. In general, it is the ‘variable’ part of this deal which causes most indignation.
Second, it is interesting that the interim report casts performance-related pay in such a poor light and yet highlights an opinion poll in which the majority of the public think that executive remuneration should be driven by their performance. This is a stark illustration of one of the fundamental problems in this whole debate: performance-related reward feels intuitively ‘fair’ and yet its implementation so rarely delivers outcomes which satisfy our desire for proportionality or ‘just deserts’. True believers in performance-related pay argue, in effect, that it is very much like Communism – a great idea which nobody has quite implemented properly yet. In reality we are caught in a fairness paradox – most of us agree that those who contribute most should profit from their labours, but we also deeply resent any hint that these rewards are in any way out of proportion to their efforts.
Third, we have real difficulty knowing what to do about this ‘problem’. Will Hutton ultimately rejected the device of a pay ‘ratio’, where CEO pay in the public sector would not be allowed to exceed 20 times that of the lowest paid. He also gave a sharp rebuke to people like Eric Pickles and the Taxpayers Alliance who argue that the PM’s salary should be used as an inviolable threshold above which no public servant should be paid without special dispensation.
The High Pay Commission looks like it is travelling much the same path that Will’s Review took and is focusing on calls for transparency, reporting, dimensions of corporate governance – especially the operation of remuneration committees – and the role of stakeholders.
The Work Foundation first called for a High Pay Commission back in 2006, not long after the DTI’s review of ‘Rewards for Failure’. The difference today is that we are in a period of intense, post-recessionary indignation about top pay and fairness. Until ‘social norms’ about rewards are fundamentally altered, and businesses work out that stratospheric pay for their CEOs harms their ability to reconnect with their workforces and with the wider public, the chances are that the the CEO pay escalator will ride on ever upwards.