Why does inequality matter? Last week, Jeremy Corbyn handed his critics another victory by blundering, ill-prepared, into an argument about whether the self-evident grotesqueness of high pay, as he saw it, meant there should be a pay cap. There is massive resentment about how tough so many lives have become, especially in marginalised Britain, while a minority, especially in London, enjoys unprecedented high incomes and wealth. Yet it is not Labour who gives vent to the grievance – but Theresa May.
A lack of clear-headedness about what really makes inequality unjust cripples the centre and the left. Nobody wants a flat earth society in which everyone is paid the same; very few believe it is fair or possible to set a cap on pay, which is why no society has ever managed to achieve it with any enduring success. It is not the apparent shocking nature of top pay that enrages and inflames people’s sense of injustice – it is unfairness.
Fairness is not a demand for equality or pay caps. It is a demand that pay should have a just, proportional and deserved link to the contribution that has been made. If a footballer earns £200,000 a week but scores or assists 30 goals a season, our eyes may roll at the sheer scale of such a reward, but our judgment is also shaped by the knowledge that rich football clubs, and their fans, want the results. Clubs are bigger, global TV audiences huge, competition more intense, success much more valuable. Top footballers’ pay may in part result from an arms race for the best, along with a modicum of sheer greed, but in part it is deserved. It is the same story for executives who transform a company.
The demand for fairness is lodged in an insistence that luck and chance should not rule our destiny. Life opportunities should not be determined by whether you are born in Grimsby or Chelsea. If someone is suffering from rank bad luck – a challenging birthplace, a war wound, cancer, infertility, poverty – that they did nothing to deserve, society should not stand by indifferently. There should be a system of social security to which we all contribute that alleviates the bad luck of poverty or illness. Huge efforts must be made to ensure that the economy is vibrant in every part of Britain.
The reason why affection for the NHS is so deep rooted is not because, as some on the left believe, it is a living example of socialism and commitment to equality. It is because it stands as an exemplar of how a good society should share the undeserved bad luck of illness. Equally, a mass of immigrants who immediately qualify for housing, schools and healthcare without having made any contribution to their existence can offend our sense of justice.
A sense of fairness is the deepest human instinct. Behavioural psychology has found that, very early in its development, a baby expects proportional reward for doing something good – and proportional penalty for doing something bad. It is undeserved and disproportional inequality that enrages us. So it is this that needs to be attacked.
The starting point has to be getting the language and argument right. What prompts anger with executive pay is the belief that it has risen far too fast for far too long with too little justification or relationship to the right kind of performance. Shareholders and society alike want – or should want – executives paid well to build great, purposed companies over time. Instead, the incentives are too much oriented to delivering a high share price in the immediate future, encouraging corner-cutting to get there. If Corbyn had said that last Monday he would instantly have had a more defensible position.
For the trouble with a pay cap – or even softening it as a target upper limit of the ratio of top pay to average pay – is that deciding what it should be is wholly arbitrary and deeply contentious, as Corbyn immediately discovered. I learned as much investigating the proposition for my fair pay review six years ago. You can make an argument for ratios of 5:1, 20:1 or 50: 1, but the reason why so few companies (even John Lewis) or societies (even communist China) make the chosen ratios stick is because the ratio is so arbitrary and itself courts unfairness.
The only viable way forward is to create the best justification process possible, along with the best-designed incentives to produce results that everyone is proud of, as the Purposeful Company taskforce argued in its interim report on pay last November. (Full declaration: I am on its steering group.) Scoring goals in football happens over 90 minutes; scoring goals in business life – innovating, building great products and market share – takes years. Reward should be phased over the same period and designed to build companies driven by purpose.
What’s more, pay has to be justified, not just at the top but throughout an organisation. The taskforce proposal is to require every company, public or private, to engage in a fair pay process in which directors engage with unions and staff over whether pay is proportional, deserved and driving the right behaviour. Here, pay ratios enter the frame, not as snapshots but as a good way of tracking pay over five years or more. A chief executive running a company that has doubled in size, paying all its people better, may be able to justify a relative pay rise over time.
The bigger problem is that far too much is paid for performance that, by definition, can only be short term or transient. A mandatory fair pay process along with publication of an annual fair pay report would be a huge step forward.
So would designing the tax system on fairness principles. It is plain that income tax rates should rise the more you earn – those with the broadest shoulders should contribute proportionately more to the common good. More scandalous is the taxation of property and land: bands of council tax on valuable homes, whose owners have done nothing to deserve the increase in property value, are disastrously negligible. Inheritance tax, for its part, has virtually ceased as an effective tax: England’s dukes own more land more than they did in the 19th century. The British tax system is designed to give to the landed and rich.
Unfairness abounds in Britain. Everyone knows it and most want less of it. There is a great prize available to the politicians, and party, who can build the coalition around convincing language to put things right. As matters stand, it will not be the Labour party.• Comments will be opened later
