Pay matters for normal employees, not CEOs

Good on Barclays and Citigroup, but we need to focus on the pay of all employees, not just those at

A woman marches at Occupy Wall Street, with a sign condemning the 1%
Cutting Bob Diamond's salary may bring the 1 per cent down, but does that help the 99 per cent? Photograph: Getty Images

Stories about shareholders challenging the size of CEO pay deals have been prominent in this week's business pages. Barclays have hurriedly amended the terms of Bob Diamond's bonus in the hope of avoiding the sort of embarrassment that Citigroup suffered when a majority of their investors rejected Vikram Pandit's remuneration package. 

In recent years, investors have been widely criticised for failing to address excessive executive pay, and while their current spate of activity is welcome there is strong evidence that they alone are incapable of systematically addressing the problem. Also, while investors (and companies, commentators and policy-makers) are now having serious conversations about executive pay, they are neglecting other problems around pay in the private sector – problems which have serious impacts on the company performance as well as on the wider economy and society. 

Articles about the pay of company CEOs are now common in, but there are far fewer stories about the pay of the wider workforce. The disproportionate focus on a tiny minority of employees is not confined to the media. Companies' annual reports are obliged to talk about pay at the top, but there is no such requirement with regard to pay at the bottom or middle. (Vince Cable recently rejected the idea of obliging companies to report on the ratio between CEO pay and that of a typical employee). This being the case, it is hardly surprising that investors engage very seldom with companies about wider workforce pay.

Companies, investors, commentators and policymakers frequently talk about the (probably incorrect) assumption that pay at the top must motivate executives by linking big rewards to company performance. There is far less talk about the correlation between narrow pay dispersion and improved company performance, or the detrimental effect of excessively low pay on the productivity, attendance, retention and mental health of low and middle ranking employees. Ignoring the wider workforce may suppress the performance of the wider company, but too often the pay of anyone outside the higher echelons is seen as a cost rather than an investment.

But investors (and policymakers) should also consider how workforce pay affects the wider economy. The CBI recently claimed that allowing minimum wage to fall behind inflation comes as "a relief" to "many hard-pressed firms", but forgets that many firms are hard-pressed because low-paid workers have little money to spend in the local economy. Excessively low pay also externalises huge costs to the taxpayer, either supplementing wages through benefits (about £6bn a year, according to the IFS) or meeting the social costs associated with in-work poverty.

Some investors have realised that companies have employees beyond the boardroom. Traditionally these have been ethical investors, whose actions may have been motivated more by ethics than investment, but some more mainstream investors (such as Hermes & NAPF) and commentators (such as the share centre) are now beginning to talk about the need to consider top pay in relation to workforce pay.

Beyond a few pioneers, shareholder interest in pay "beyond the boardroom" is pitifully limited. Hopefully investors themselves will take more of an interest in the business case for whole-workforce pay policies, but if their engagement with the issue of excessive executive pay is any thing to go on, that will take a very long time. We need both the media and policymakers to take a lead, by ensuring that the conversations they have with business leaders are not disproportionately about those business leaders.

Our businesses, economy and families need to move away from model that often appears to regard top pay is a matter of motivation and everyone else's pay as a matter of cost. If we do not move away from such a model, the economy will remain unnecessarily sluggish and brutal.