Let’s talk money

Three working days into the new year was the point at which earnings of bosses at top companies had already surpassed what a typical British worker would make in an entire year.

The ratio of CEO pay to the average full-time worker is 120:1, according to research from the High Pay Centre and CIPD. Average FTSE 100 CEO pay may have dropped to below 2014 levels but it still currently stands at an impressive £4.5 million a year.

It’s a figure described as “grossly excessive” by both unions and employer bodies as well as organisations such as the High Pay Centre.

In response, the government announced last month that listed companies with more than 250 employees will be legally required to publish and justify the pay difference between their chief executives and employees.

Ministers have taken this step to encourage greater transparency and accountability. And because they are mindful of the anger felt when bosses’ pay is out of step with organisational performance, according to business secretary Greg Clark.

If the new laws are approved by parliament companies will need to start reporting their pay ratios in 2020.

 

Leaders are said to have greater value now more than ever

CEOs do have significant worth, however. Their influence over a company’s bottom line has become more pronounced in recent decades with research showing that following an unexpected death of a CEO, a company’s market cap increases or decreases by $65 million more than it did 60 years ago.

The US study explains that for a CEO perceived as ineffective, their death can trigger a positive reaction from the stock market pushing a company’s value up (because, to put it brutally, investors see the company as better off without them).

When a highly regarded leader suddenly dies, on the other hand, the market reacts negatively, wiping company value off. When Apple’s Steve Jobs died in 2011, the company’s stock price immediately fell.

It demonstrates quite how much weight is attached to ‘the CEO effect’ and why their pay is soaring. “CEOs matter more than they used to, for good and for ill,” co-author of the research Craig Crossland says.

Does that mean we shouldn’t be holding executive pay to account?

Instinctively, the imbalance between what chief executives and workers earn feels morally wrong.

Though the arguments for greater restraint on so-called fat cat pay go well beyond that.

UK productivity has been subdued since the 2008 global economic downturn. Figures for the last two quarters in 2017 have showed some improvement but, overall, performance has been lacklustre and failed to recover to their pre-2008 rates of growth, which would be the more usual course of events, according to economists.

Though this “productivity puzzle” is not fully understood, a Reuters article published this April, highlighted that: “Economists blame a mix of low business investment, bad management and poor technical skills training for the shortfall.” Although there are clearly manifold factors at play, that’s hardly a glowing reference for CEOs.

 

Giving employees a say on their bosses’ pay

Unions have welcomed the current proposals on fat cat pay but warned they are not stringent enough. The TUC has pointed out that academic evidence shows high wage disparities within companies actually harm productivity and company performance. Indeed, a 2015 CIPD survey of 1,000 workers revealed that 60 per cent agreed CEO pay levels in the UK demotivate employees.

As a result, the TUC has urged the government to require companies to give workers a seat at boardroom pay committees to “inject a bit of common sense to decision-making when boardroom pay packets are approved.”

But the challenge for unions remains trying to narrow the pay gap from the other end too – campaigning for a higher minimum wage and using collective bargaining to increase pay for the average worker.

It’s all part of making for a fairer economy, says the TUC.

What does a fair economy look like? I would imagine one in which average people (and not just a wealthy elite) can better afford the very goods and services CEOs are trying to make a profit from.

At the same time, although taking measures to improve decision processes around executive pay is the sensible way forward, it shouldn’t be done in a way that could compromise company performance or its ability to attract top talent.

 

Andy Cook is CEO at Marshall-James