The debate about pay inequality is often conducted in dry statistics, figures and graphs. The Divide, a film released last week, is refreshingly different: it tells the story of how the realities of inequality play out in people’s lives. It follows low-paid workers in the service industry struggling to make ends meet, and people living in gated developments with no sense of community. Leah, who works long shifts six days a week for take-home pay of $150 a week is so busy she hasn’t even had time to watch the film.
Here in the UK, real wages have fallen by more than 8% between 2007 and 2014. Yet CEO pay has been steadily rising: shareholders reacted angrily to news that Bob Dudley of BP was awarded a £14m settlement despite losses and job cuts, rejecting the package in a non-binding vote. The top-paid FTSE 100 CEO, Martin Sorrell at WPP, is paid a staggering £70m a year. Analysis by the independent High Pay Centre shows FTSE 100 CEOs are paid an average of almost £5m a year, 183 times the average UK employee, up from 160 times just six years ago. Thirty years ago, these multiples were a fraction of what they are now.
Why has CEO pay risen in such an astounding fashion? There’s no evidence top director jobs have got harder, nor that CEOs have got better: CEO pay has risen far more quickly than any measure of company value.
Boards like to cultivate a self-serving mythology of what makes for a top CEO: they argue there is a tiny pool of people with the skills to run a top company; hence boards have to pay top rates to get the best talent.
This myth falls apart under the lightest of scrutiny: it is widely acknowledged that there is huge variation in the quality of top CEOs. They are not, on the whole, wealth creators or entrepreneurs: the FTSE 100 is not the slice of the economy from which real jobs growth is driven. Why, then, do we pay them so much?
There is a dirty secret at the heart of the system for setting CEO pay: it is far from competitive. Jobs are not advertised. Board pay is negotiated behind closed doors by a group of people on six-figure salaries: board members who want to be seen to be paying in the top quartile of FTSE 100 pay to send a signal about the quality of their CEO; CEOs who want the status associated with climbing the ranks; and remuneration consultants, supposed to offer independent advice but often too close to the boards and CEOs involved. There is nobody in the room representing those with an interest in pay restraint: employees and shareholders. So pay continues to be ratcheted up. Even leading business representatives, such as Simon Walker from the Institute of Directors and top headhunters think executive pay has spiralled out of control.
This is not just bad for inequality, it is bad for business: CEO remuneration is heavily skewed towards short-term share options, which encourages CEOs to push up the short-term share price by inflating profits in the short run, dampening long-term investment and growth.
And runaway CEO pay is itself a symptom of the short-termism that afflicts Anglo-Saxon capitalism. A combination of the declining proportion of shares held by long-term institutional investors and the growing use of asset managers rewarded for quarterly, not long-term performance to manage their funds, means that cashflows 30 years into the future are hardly valued by investors. This dampens investment and harms the long-term growth potential of our biggest companies.
While CEO pay has risen far in excess of any measure of productivity, the opposite has been happening across most of the rest of the labour market. Wages would have been 20% higher if they had tracked productivity growth since 1990. Young people’s employment prospects have become particularly grim since the recession. Resolution Foundation analysis has shown young people’s earnings have taken by far the biggest hit since 2008. Even as top CEOs are found lining their pockets, businesses are not adequately investing in developing young people’s skills. Three-quarters of the growth in apprenticeships has been in those for the over-25s, and levels of employer-funded on-the-job training has been steadily falling in recent years. Beginning a career in this unforgiving labour market, where it’s not uncommon to find graduates doing bar work on a zero-hours contract, will have long-term consequences.
This is a sign of the fundamentally different times we are now in. There was once a British tradition, epitomised by great businesses such as Cadbury, Rowntree and Boots, of taking their responsibilities to the communities on which they built their success seriously. But all these businesses have been taken over by global conglomerates, behemoths distant from the people who work for them and buy their products. We regularly hear of global corporations avoiding tax and misleading consumers; it feels like we live in a world where more than ever it is acceptable for big businesses to pursue profit at any price.
There are reforms that could make a difference. Companies should have to disclose the pay ratio of the CEO and their median worker; putting employee representatives on remuneration committees would ensure there is at least someone in the room with an interest in pay restraint. Government should take a tougher approach to getting businesses to invest in the next generation; the new apprenticeship levy is a step in the right direction.
But ultimately there is only so far government cajoling will get us. In both the US and the UK, there has been significant reform of corporate governance to try to increase long-termism, but with limited effect: boardroom culture is hard to shift. Businesses are expert at deploying government training incentives to do what they would have done anyway.
There is no such thing as values-neutral capitalism: there are better and worse ways to do business in terms of the social value – and costs – that the business sector generates. Governments can change the rules, but businesses also need to do their bit. Otherwise, the gap so effectively illustrated by The Divide will only get worse.
