An end to dizzying pay

Published 18 August 2009

Excessive pay at the top encourages massive risk-taking. We need a High Pay Commission to limit casino capitalism

Canary Wharf, London. Credit: AFP/Getty Images

It was called a "stranglehold on prosperity" when it first launched. And yet the fear-mongering that accompanied the introduction of the National Minimum Wage, as recommended by the Low Pay Commission, proved to be groundless. Now even the Tories would not dare touch it. Ten years on, one hundred progressives, including myself, have signed a letter calling for a "High Pay Commission". Launched this week by the pressure-group Compass, the campaign calls on the government to fully review "pay at the top" and to consider capping "excessive remuneration".

The financial crisis has highlighted the urgent need to re-balance the pay differentials between the lowest and highest earners. Many economists have pointed out that the current crisis was caused by a culture of greed and risk-taking. It exposed the fallacy of the basic capitalist assumption that remuneration is closely linked to performance, especially at the top. In fact our pay system not only hid deep losses in the financial sector, but failed to penalise executives when their failures came to light.

The current, dizzying pay structure for executives rewards them for making huge short-term profits at the expense of building stable, growing businesses. It encourages them to take massive risks, putting our pensions and the economy at huge risk, and get out when the company crashes.

But the call for a High Pay Commission isn't just about preventing another financial crisis. It is about pushing for businesses to operate in a more healthy way. As the pay-gap between workers and executives grows exponentially, the two groups become alienated from one another. Workers feel they are not sharing equitably in the fruits of the company's success, reducing productivity. This is especially pronounced in a knowledge-based economy where innovation is needed across all levels of companies.

A recent report from Harvard University found that executive pay was eating a larger share of company profits than ever before. A High Pay Commission could also limit bidding wars for executives, which push pay inflation at the top end even higher. Wage-inflation at the top is frequently used by company boards as a reason for why they have to pay so much to attract talent.

The crisis illustrated that there is deep market failure within the financial sector when it comes to linking pay and performance. The market panders to executives while employees have little say in what goes on.

We need to find ways to redress that balance otherwise we'll have an economy continually plagued by boom and bust, which benefits only high-earners. It may seem like a revolutionary idea, and like the Minimum Wage it will attract put-downs from industry. But criticisms for policies aimed at bottom-earners proved groundless; so may those aimed at the top.

Sunny Hundal is the editor of Liberal Conspiracy and Pickled Politics

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4 comments from readers

ukpoliticalreform
19 August 2009 at 04:36

We are led to believe that the top salaries attract the top people. Well I say this is utter bulls***. I work in Network Rail and see senior managers screw the workforce on pay and conditions whilst they do very little and award themselves massive bonuses. I can run my entire department and do it for half that of the senior manager which would save the tax payer around £70,000 a year, yet as I am just a lowly worker who despite having great money saving ideas, will always be ignored as it upsets the status quo of the existing parasite culture. As Jim Royale would say "Premium money for premium minds - my arse"

mount
20 August 2009 at 16:16

One thing that may happen (you never know) is that 'highly desirable' executives may make employment choices based on quality of life / challenge / even philanphropic criteria rather than on who is going to pay them most. Capitalism need not be focussed solely on money, it just (dismally) appears to be the only thing currently recognised to have value.

Then, if you want to earn sackloads of money, go and start your own business, take risks with your own money, and spread it about.

Keir H
02 September 2009 at 11:56

The Low Pay Commission opposed by company bosses predominately from the manufacturing sector as costing them too much have far less influence than those who work in the City. A High Pay Commission will be impossible to implement, as we have seen after the Credit Crunch debacle, bonuses are being paid only a few months after receiving Tax Payers money. Financial institutions have unfettered power to make the rules to suit themselves with no oversight from Government.

A good idea worth exploring but until this or perhaps the next Government stands up to the City there won’t be any changes to Executive salaries.

iainburnshill
23 October 2009 at 18:41