A woman at a protest against banker's wages outside Chase bank in New York. Photo: Chris Hondros/Getty Images
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The head of a big company now makes more in a day than a worker on the minimum wage earns in a year

Soaring executive pay would be more ­justifiable if it reflected companies’ results. Yet the High Pay Centre report argues that this is not the case.

Cedric the pig enjoyed its moment of fame 20 years ago. The GMB trade union took the hefty hog to the annual general meeting of British Gas, whose then chief executive, Cedric Brown, had been granted a 71 per cent increase in pay and benefits, including a £475,000 salary: around £800,000 in today’s money.

Though the stunt failed (Brown kept his cash), the outcry over his package and other instances of excessive pay for bosses led to reforms in corporate governance. Two main principles for executive compensation were established. First, levels of pay should be set by remuneration committees that include independent non-executive directors. Second, earnings should be linked to the company’s long-term performance. Besides a salary, a typical chief executive’s package has an annual bonus and a long-term incentive plan (LTIP).

The result of the changes has been a huge surge in pay. A report by the High Pay Centre think tank in May showed that in the late 1990s the average FTSE-100 CEO took home roughly £1m. In 2014, that figure was £5m. Each of these bosses now earns roughly £20,000 every working day: one and a half times as much as a minimum-wage, 40-hours-a-week worker makes in a year.

Soaring executive pay would be more ­justifiable if it reflected companies’ results. Yet the High Pay Centre report argues that this is not the case. Between 2000 and 2013, bonus payments at the UK’s top 350 listed companies increased at twice the rate of earnings per share and company profits, two of the main metrics used to compute payouts. For LTIPs, it was even worse: little more than a quarter of the annual change in payments to executives could be attributed to a rise in earnings per share or total shareholder return in any year in the ­decade to 2013. “The net result is that CEO pay growth has dramatically outpaced pay increases across the wider economy, without any corresponding increase in company performance,” the report concludes.

Other data confirms the ever-widening pay gap between bosses and the rest of the workforce – not just the lowest-paid. It is a trend that is fuelling the debate about the “1 per cent” and inequality. The research group Incomes Data Services recently calculated that a FTSE-100 chief executive is paid 120 times more than an average full-time employee, up from 47 times in 2000. Compare this to the ratio of 20:1 that the American management consultant and writer Peter Drucker once said was the limit before a firm experienced employee resentment and decreased morale, or the paper, published last year by Chulalongkorn University’s Sorapop Kiatpongsan and Harvard Business School’s Michael I Norton, which showed that Britons thought the “ideal pay ratio” for chief executives to unskilled workers was 5.3:1.

So, it is little surprise that people from across all sectors of business agree that the current model of executive compensation is broken. At one end of the spectrum is the TUC, which argues that the concept of performance-related pay is fatally flawed because it is impossible to measure fairly an individual’s impact on a large company. At the other end is the Institute of Directors, whose opinion may be even more damning, considering its status as the “independent association of business leaders”.

The IoD’s director general, Simon Walker, said at the launch of the High Pay Centre report that “routine excessive pay has become too common in Britain” and that there is “a strong case for wholesale reform”. Even those who helped force through the corporate governance changes in the 1990s concede that the system has not worked as intended. David Pitt-Watson, who led the shareholder engagement activity at Hermes Investment Management, which manages £30bn, and who is now an executive fellow at London Business School, told me: “It is a very big problem that we can observe little correlation between company success and high pay.”

Why has it gone so wrong? Remuneration committees, whose members may be independent but are also often part of the high-pay club, must take some of the blame. Large shareholders, too. As in Cedric the pig’s time, protests from minority shareholders have little effect if the biggest stakeholders – the handsomely paid fund managers who hold our pension money – do nothing. Last year, a majority of shareholders in only one FTSE-100 company – Burberry, whose new boss, Christopher Bailey, had received shares worth nearly £20m and a pay packet of up to £10m a year – voted down a chief executive’s pay.

Besides wasting shareholders’ money, excessive performance-related ­compensation can damage a company’s prospects – and the economy. Many LTIPs pay out after three years, which encourages executives to push up profits hastily and, as a result, to limit investment that would yield benefits in the longer term, according to the economist Andrew Smithers. This, he believes, is why the UK’s labour productivity is so poor compared to that of other G7 countries.

So what can be done? Among the High Pay Centre’s recommendations are abolishing LTIPs, broadening the range of company-specific targets used to calculate bonuses and improving diversity on remuneration committees. Pitt-Watson’s suggestion is even more radical.

“Should we not rather be saying: let’s give you a good salary and a ‘normal’ bonus of 15 or 20 per cent, rather than one of five or six times the salary? Surely we want to create a society where the CEO is a respected person and acts in the company’s best interest, without the need of some huge payment to ensure they are doing their job well?”

Xan Rice is features editor of the New Statesman

Xan Rice is Features Editor at the New Statesman.

This article first appeared in the 11 June 2015 issue of the New Statesman, Who owns the future?

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Labour is launching a stealthy Scottish comeback - thanks to Jeremy Corbyn and the Daily Mail

The Scottish Labour strategy is paying off - and hard evidence that it works may be more plentiful come 8 June 2017

When I suggested to a senior Scottish Labour figure earlier this year that the party was a car crash, he rejected my assertion.

“We’re past that,” he said gloomily. “Now we’re the burnt-out wreck in a field that no-one even notices anymore.”

And yet, just as the election campaign has seen Jeremy Corbyn transformed from an outdated jalopy into Chitty Chitty Bang Bang magically soaring in the polls, Scottish Labour is beginning to look roadworthy again.

And it’s all down to two apparently contradictory forces – Corbyn and The Daily Mail.

Kezia Dugdale’s decision to hire Alan Roden, then the Scottish Daily Mail’s political editor, as her spin doctor in chief last summer was said to have lost her some party members. It may win her some new members of parliament just nine months later.

Roden’s undoubted nose for a story and nous in driving the news agenda, learned in his years at the Mail, has seen Nicola Sturgeon repeatedly forced to defend her government record on health and education in recent weeks, even though her Holyrood administration is not up for election next month.

On ITV’s leaders debate she confessed that, despite 10 years in power, the Scottish education system is in need of some attention. And a few days later she was taken to task during a BBC debate involving the Scottish leaders by a nurse who told her she had to visit a food bank to get by. The subsequent SNP attempt to smear that nurse was a pathetic mis-step by the party that suggested their media operation had gone awry.

It’s not the Tories putting Sturgeon on the defence. They, like the SNP, are happy to contend the general election on constitutional issues in the hope of corralling the unionist vote or even just the votes of those that don’t yet want a second independence referendum. It is Labour who are spotting the opportunities and maximising them.

However, that would not be enough alone. For although folk like Dugdale as a person – as evidenced in Lord Ashcroft’s latest polling - she lacks the policy chops to build on that. Witness her dopey proposal ahead of the last Holyrood election to raise income tax.

Dugdale may be a self-confessed Blairite but what’s powering Scottish Labour just now is Jeremy Corbyn’s more left-wing policy platform.

For as Brexit has dropped down the agenda at this election, and bread and butter stuff like health and education has moved centre stage, Scots are seeing that for all the SNP’s left wing rhetoric, after 10 years in power in Holyrood, there’s not a lot of progressive policy to show for it.

Corbyn’s manifesto, even though huge chunks of it won’t apply in Scotland, is progressive. The evidence is anecdotal at the moment, but it seems some Scots voters find it more attractive than the timid managerialism of the SNP. This is particularly the case with another independence referendum looking very unlikely before the 2020s, on either the nationalists' or the Conservatives' timetable.

Evidence that the Scottish Labour strategy has worked may be more plentiful come 8 June 2017. The polls, albeit with small sample sizes so best approached with caution, have Ian Murray streets ahead in the battle to defend Edinburgh South. There’s a lot of optimism in East Lothian where Labour won the council earlier in May and MSP Iain Gray increased his majority at the Scottish election last year. Labour have chosen their local candidate well in local teacher Martin Whitfield, and if the unionist vote swings behind him he could overhaul sitting MP George Kerevan’s 7,000 majority. (As we learned in 2015, apparently safe majorities mean nothing in the face of larger electoral forces). In East Renfrewshire, Labour's Blair McDougall, the man who led Better Together in 2014, can out-unionist the Tory candidate.

But, while in April, it was suggested that these three seats would be the sole focus of the Scottish Labour campaign, that attitude has changed after the local elections. Labour lost Glasgow but did not implode. In chunks of their former west of Scotland heartlands there was signs of life.

Mhairi Black’s a media darling, but her reputation as a local MP rather than a local celebrity is not great. Labour would love to unseat her, in what would be a huge upset, or perhaps more realistically go after Gavin Newlands in the neighbouring Paisley seat.

They are also sniffing Glasgow East. With Natalie McGarry’s stint as MP ending in tears – a police investigation, voting in her wedding dress and fainting in the chamber sums up her two years in Westminster – Labour ought to be in with a chance in the deprived neighbourhoods of Glasgow’s east end.

Labour in Scotland doesn’t feel like such a wreck anymore. Alan Roden’s Daily Mail-honed media nous has grabbed attention. Corbyn’s progressive policies have put fuel in the tank.

After polling day, the party will be able to fit all its Scottish MPs comfortably in a small hatchback, compared to the double decker bus necessary just a few years back.

But this general election could give the party the necessary shove to get on to the long road back.

James Millar is a political journalist and founder of the Political Yeti's Politics Podcast. He is co-author of The Gender Agenda, which will be published July 21 by Jessica Kingsley Publishing.

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