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Stephen  Bevan

Can we keep a lid on executive pay?

Authors: Stephen Bevan Professor Stephen Bevan

09 January 2012

It’s the start of the bonus season. This week, US banks will start to announce the bonuses some of their top executives will be enjoying, closely followed in the coming days by their UK counterparts. The flurry of headlines over the weekend – prompted by the Prime Minister’s media appearances – were an attempt to diffuse the indignation that the bonus season will trigger, without giving away much detail on what the Coalition plans to do.

In reality, despite Mr Cameron’s talk of ‘market failure’, there are only limited steps that the government can or will take on top pay, especially given the strong voices from the right of the coalition and from many business lobby groups against stifling entrepreneurship or wealth creation. So what is the problem and what might realistically be done?

An important issue is that executive pay has grown rapidly over the last 30 years, and has not always reflected company performance or the prevailing climate of pay determination in the wider economy. For example, Will Hutton’s review on Fair Pay in the public sector, published last March, also took a look at movements in executive pay in the private sector. Among other things it showed that senior executive pay has been growing at a faster rate in sectors like banking and finance – 60% of the increased income share attained by the top ten per cent has accrued to workers in financial services, even though they account for only around 5% of the UK workforce. It also looked at pay ‘dispersion’ – the gap between the top and median salaries. His review found that, in 2009 FTSE 100 CEOs achieved a pay ratio of 88 times the median UK wage (2000: 47 times) and 202 times the minimum wage (2000: 124 times).

Data from the High Pay Commission shows that, in 2010/11, executive pay in the FTSE 100 rose on average by 49% compared with just 2.7% for the average employee.

Much of the debate around top executive pay has focused on the concept of ‘fairness’ or ‘due desert’ and I covered some of these issues in a blog about top pay at the BBC last July. The focus is now shifting to what can be done to prevent this problem getting worse and there are at least two areas where proposals look likely in the Queen’s Speech.

The first is to give shareholders a binding vote over executive remuneration. This idea is already being criticised for being too weak. We already know that, overall, less than 10% of shareholders abstain or vote against the mandated Directors Remuneration Report resolutions at AGMs, though problems are often ironed out beforehand through shareholder consultations. Research cited in The Guardian today shows that just 18 company remuneration reports have been voted down in the decade since the Labour Government first gave shareholders a say on pay.

The second area of focus is likely to be increased transparency, probably by requiring listed companies to publish the ration between the CEO and median pay (possibly on a five year rolling basis) and to explain any changes. This would certainly improve scrutiny and require the inner workings of remuneration committees to be more open. Yet not even this approach would be welcomed by everyone. In a paper published last year by Hay Group, it was argued that publishing a simple ratio indicating the gap between CEO pay and median pay was probably only meaningful when comparing firms in similar sectors. The authors also carried out some analysis to see whether firms with narrow pay dispersion performed better than those with wide dispersion. They concluded that:

“In no instance did we find a significant (+0.75 or -0.75) correlation between having more equal pay (a lower multiple of average employee pay to CEO pay) and better performance or vice versa. Nor did we find a significant correlation between having a better paid CEO compared to other employees and company performance.”

This is an issue which will continue to dominate headlines and challenge the government’s willingness to take decisive action. The Work Foundation will continue to monitor the debate and, later in the spring, we hope to publish some new data on executive pay which is been analysed and written up by one of our Lancaster University colleagues Dr Anthony Hesketh.

Comments in Chronological Order (Total 2 Comments)


11 Jan 2013 5:55AM

The reason there are jobs and industries that pay more is because we are knowledge workers in a difficult industry that is rapidly changing.

Some of us work 70 hrs a week to protect clients retirement funds... and do a good job of it... should be paid more.

More than say a Teacher, or a Janitor or a Journalist.

Responsibility + Economics = Pay

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