When we should probably be asking why CEOs are being paid astronomical amounts compared to the shop floor?
The Observer (28/11/2010) printed a fascinating analysis by Professor Danny Dorling in advance of the publication of the government’s Fair Pay Review.
The headline figures are staggering. Bart Becht, of Reckitt Benckiser, and the highest paid FTSE100 CEO, is paid £93 million (I can’t bring myself to write that someone, leaving aside the fact that he sounds like a cartoon character, actually earns that much).
Pay differentials are almost back to 1918 levels when 1% of earners received almost 20% of income. This inequality declined steadily until the mid 70s but since then the position has reversed and inequality has increased close to where it was almost 100 years ago.
Salaries in most jobs have increased between 3 and seven times since 1980 but for executives they have increased fifty-fold. Nurses earned £5,000 in 1980, now they earn over £29,000; teachers earned £6,500 then and earn £35,000 now; GPs earned £12,500 then and earn £78,000 now. The PM earned £34,500 then and earns £150,000 now.
But CEOs of FTSE100 companies who earned £85,000 then now receive on average almost £5 million according to Income Data Services which also showed that this 2009 figure had increased 50% in the previous year (recession? What recession you might ask as average boardroom pay in top companies increased by 45%). This is 200 times the average wage of £23,360 including bonuses, an increase of 1.5% over the previous year. CEOs basic pay rose by 3.6% but they received bonuses averaging over £700,000!
To put this in perspective, if you are paid the minimum 21-year-old wage of £5.93 per hour you are typical of the poorest 20% of employees. Double that to £10 an hour and you are typical of the average earner, and if you earn £14 an hour that puts you in the top 20% of earners. Hard to believe when you see the stratospheric sums paid to these executives (and let’s not even go to “Rooney-world” – fantasy football indeed). Perhaps not surprisingly a recent poll showed that only 1% of people think CEOs should be paid so much and 2 out of 3 think they should be paid no more than £500,000.
Britain has one of the highest pay differentials in the world. Higher than Australia, New Zealand, Canada and Japan. And in the OECD only Italy, Poland, USA and Portugal have higher inequality. And it’s not as if these are generally the entrepreneurs, the inventors, the innovators or people who have invested in the company. So how did we get to this position? Don’t forget things were improving ie less inequality up to the mid-late 1970s when it did a U-turn under Margaret Thatcher’s tenure.
First, I think the privatisation of public companies such as the GPO, British Gas and water companies played a part. Suddenly public service managers who were either civil servants or local government employees, and therefore not the highest paid but with a good pension plan, wanted to have pay parity with their competitors in the private sector because of the assets they had inherited. The fact they were often in monopolistic positions and had no real competitors didn’t matter. It suited the government and the soon-to-be public sector fat-cats to pretend otherwise. The BBC is another example. They were set up as a public service broadcaster yet manage to reward their top people with extravagant salaries and pension packages.
Secondly, the influence of private sector practices on those areas that remained within the public sector such as the NHS. The government put senior managers on performance related pay (not to be confused with bankers on minimum 50-100% bonuses but a miserly 1 -3% if you were lucky) which allowed them to use Job Evaluation to set salary levels. I have nothing against Job Evaluation and when I was in HR was happy to use it. But at some point you have to decide who your comparators are and at what percentile.
So public sector organisations which said they “valued staff” wouldn’t want to be seen to compare their senior managers with just the median rates because they didn’t want to be seen employing averagely paid people. Upper quartile (top 25%) sounded significantly better without seeming profligate with tax-payers’ money. And in the beginning there weren’t other NHS or local authority comparisons but there were the newly privatised utilities. And we know they had already ramped up their pay rates.
And now we have private sector remuneration committees who do exactly the same – comparing their own salary levels with their competitors without regard to internal differentials and increasing inequality.
So why is it a bad thing? Research suggests that where societies are more equal there are better indicators of mental health and social mobility. And of course there is a profound sense of unfairness. It’s been predicted that the Fair Pay Review might recommend a pay multiple of 20:1. So a minimum wage earner working 38 hours earns £11,700 a year. Twenty times that would be £234,000 a year, almost twice the Prime Minister’s pay and what most people would consider more than adequate. Given what I said earlier about public/private sector pay comparisons this ratio would have to apply across the board.
And if David Cameron is serious about a well-being index what better place to start?
Updated 16 May 2011: Interesting report in Saturday’s Observer by its business editor, Andrew Clark, on the Institute of Directors (IoD) event at the O2 arena.
Brendan Barber from the TUC was there encouraging companies to pay their workers more to increase economic demand and get the economy working again. Partly he was arguing for a fairer economy but he also quoted various economists to support his argument. Even Boris Johnson has said it is “morally right” to pay workers in London a “living wage” of £8.30 an hour compared to the current adult minimum wage of £5.93 an hour.
Perhaps not surprisingly the IoD delegates were unimpressed and denied that workers were being exploited – at a time when pay for the top 350 board members jumped 45% last year.
But as Clark commented, loyalty works both ways and when the good times return workers won’t necessarily stay with their present employers if they are not looked after when times are hard.
Of course there are gender pay differentialsbut probably not as wide-spread as some people claim. Public sector has had equal pay for years but the financial institutions are probably the bad boys here (literally).
The Department for Business, Innovation and Skills found that FTSE100 CEO’s pay rose by 14% annually between 2000 and 2010. The FTSE100 index rose by 1% annually over the same period.
In 2000 bosses’ pay was 59 times that of their average employee. In 2010 that had increased to 119 times.
Updated 7 September 2011: And it’s not just the pay but the pension pots for top directors. For a FTSE100 company director it averages almost £4 M, enough to provide a pension of over £220,000 a year according to the TUC.
The average private sector pension is £9,568 and £6,497 in the public sector. The TUC points out that these company directors are paying themselves high salaries and bonuses and making sure they have these gold-plated pensions whilst closing pension schemes for their employees.
Updated 12 September 2011: Who would have guessed that FTSE bosses have had their pay frozen for two years! Even IF they did they are making up for it with basic pay up between 4 and 10%, regardless it seems of company performance. The 4% raises amongst FTSE350 executives is twice as much as the average worker according to Deloitte.
Deloitte also say bonuses have increased. For FTSE100 directors from 71% to 87% and for FTSE250 directors up from 54% to 86%.
Some companies have built in payback clauses in the case of poor performance and some are offering deferred bonuses.
Nevertheless remuneration committees could do more to reign in excessive pay awards way ahead of inflation and of the average worker.