Since the 1980s, executive pay has risen hugely, with recent figures putting the average pay of a FTSE 100 CEO at 190 times the income of an average UK worker. Whilst high pay has risen dramatically, wages for low and median workers have been rising at a much slower rate, increasing levels of pay inequality. Organisations such as the CIPD, the IoD and PwC have all criticised the current model of executive pay, and there have been instances of public backlash against what is perceived as excessively high pay. Executive pay was mentioned in the 2017 manifestos of all three major parties, all concerned with lowering levels.
High executive pay can be damaging for businesses for two primary reasons. Firstly, it can be bad for a business’ reputation in the eyes of the public, and secondly, there is evidence that high levels of pay inequality within the workforce are bad for staff morale and productivity. Some pay inequality is motivational, encouraging staff to work hard to be promoted, but according to research by the High Pay Centre, companies in which the highest paid member of staff earns over 24 times the lowest paid experience higher staff turnover, greater absenteeism and more frequent industrial action. Furthermore, there is mounting evidence that high pay inequality is damaging to society overall.
Whilst some argue that high pay is deserved because of the value highly experienced executives add to huge companies, executive pay has been increasing year on year. In their submission to the Department for Business, Energy and Industrial Strategy, the CIPD and High Pay Centre argue that these increases have surpassed the increase in company value, suggesting that pay is not in line with performance.
Levels of high pay are partly caused by methods of recruitment. Rather than promoting internally, some companies hire head-hunters to seek out senior staff from elsewhere, who are then promised pay increases to take on a new role. The nature of pay packages also exacerbates levels of high pay. Long term incentive plans have been criticised because this may, counterintuitively, encourage short-termism , and CEOs discount the value of delayed pay, and therefore negotiate a higher level of overall pay. Evidence also suggests that increasing the complexity of packages, with a mix of component parts and various incentives does not lead to lower levels of executive pay. Instead, CEOs are generally more willing to accept a lower yet simpler pay package. Incentives have been criticised, not because they don’t work, but rather that current practices encourage behaviours that are not aligned with company purpose. Suggestions on how to change this include basing performance on measures that aren’t purely financial.
Levels of executive pay are typically decided by remuneration committees. These have the potential to curb high executive pay, or reinforce the current trend. The TUC advocates that employees be included on these committees, making the committee accountable to the workforce and bringing a diversity of viewpoints. Further, such committees can be made more effective by ensuring that they are fully independent of executive staff, so that senior executives do not unduly influence discussions, or indeed make the final decision. Transparency over decisions and decision-making processes may also increase accountability. Additionally, shareholders have a role to play, and companies can restore public faith in the system of executive pay by having effective procedures in place to address and accommodate shareholder disapproval.
However, it has been argued that transparency over levels of executive pay may be exacerbating the problem. Research from PwC and the LSE suggest that disclosure of executive pay has provided opportunities for cross-comparisons from companies and executives, and a subsequent pay ratcheting to keep pace. Companies try to employ CEOs with higher salaries to improve their status, while CEOs themselves negotiate higher pay packages in order to be paid the same or higher than their peers at comparable companies. Indeed, research has suggested that whilst many CEOs are willing to be paid less money, they don’t want to paid less than their peers. This does not mean that transparency is wholly counterproductive. Rather, full transparency is part of a set of approaches that can assist in reforming executive pay, and extends to the full process of deciding executive pay packages.
The ratio between the highest paid and lowest paid members of an organisation has also been cited as a concern by unions, campaigners and politicians. When looking at pay ratios, sector and company size are important to bear in mind. A bank where everyone is highly paid is likely to have a lower ratio than a supermarket where most of the workers earn lower wages, even if the bank’s CEO is in fact paid more. Further, it should be noted, that a desire to keep pay ratios low may lead to companies ‘outsourcing’ low-paid work such as cleaning. On the other hand, highly paid individuals may work through ‘personal service companies’ receiving payment, rather than income. Ratios are therefore only valuable if they are provided within the context of the company, regarding its sector, size etc, and with full disclosure on how ratios were calculated, for example, if the ratios include contractors’ pay. Alone, publishing ratios does not resolve issues surrounding high executive pay, but it can play an important role in addressing them as part of a raft of possible solutions.