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An end to dizzying pay

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

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

Sunny Hundal is editor of Liberal Conspiracy.