Excessive CEO pay is a symptom of an economy that rewards owners not workers

Median executive pay rose 11 per cent between 2016 and 2017, according to a recent report. 

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This week’s labour market release suggests that, for most workers, wage growth remains stuck in the doldrums even as unemployment falls to new lows, with real wages still struggling to regain the ground lost in the wake of the 2007-8 financial crisis.

The leaders of the UK’s biggest companies suffer no such problem. A recent report from the High Pay Centre, which surveys FTSE 100 CEOs’ annual pay settlements, finds that median executive pay rose 11 per cent between 2016 and 2017. This means the average FTSE 100 CEO is now paid 77 times what the average employee at their company is paid, and 167 times the average wage nationally. The average masks large variations: for a handful of companies, the within-firm pay ratio is more than 1,000 to 1.

Shareholder objections – and public outcry – only seem to do so much to curb extreme pay growth at the top. Take the example of the FTSE’s highest-paid CEO – Jeff Fairburn of Persimmon plc, a housebuilding company. Widespread condemnation of the company’s long-term incentive plan (LTIP), and what it implies for pay of the executive team, only succeeded in reducing the expected value of Fairburn’s incentive scheme over the next few years from £110m to £75m. And it hasn’t prevented him being paid £47.1m in 2016-17 – a 22-fold increase on his pay packet the previous year. This is despite Persimmon not being accredited as a living wage employer.

The government has responded to the increasing prevalence of LTIPs by regulating to increase pay transparency: from 2020, all large employers will be required to report their pay ratios – the pay difference between chief executives and their staff. They will also have to set out their justifications for the salaries they pay. This will help to focus minds, as gender pay gap reporting has done, and is welcome.

However, corporate governance reform could and should go further to force scrutiny by the right people of CEOs’ remuneration. This should take the form of elected worker directors on company boards – a minimum of two in the case of large businesses – and employee representatives on remuneration committees. This would introduce a greater diversity of interests and viewpoints to the pay-setting process, and give workers a say in the pay settlements of their bosses. And while the government’s requirement that companies set out how they are acting in the interests of their stakeholders, not just their shareholders, is a step in the right direction, we think putting employees on a par with shareholders in directors’ duties is the only way to bring an end to the flawed model of shareholder primacy.

Keeping an eye on the bigger picture is also essential. Rising executive pay is one consequence of a broader macroeconomic problem: that the proceeds from growth increasingly flow to those who have a capital stake in the economy, rather than to those who provide their labour. Jeff Fairburn’s exceptionally-high remuneration, for example, is the result of his shareholdings in the company, rather than just his take-home pay.

At the whole-economy level, the “labour share” – the proportion of national income that goes to wages and salaries, rather than to owners of capital – looks to be on a long-term declining trend. In the mid-1970s the labour share was just under 70 per cent; today it is around 53 per cent. Within the share that goes to wages and salaries, those at the top have been receiving an increasing proportion.

Technological change could force further declines in the share of growth going to ordinary people, as the gains from growth increasingly flow into the hands of those who own capital, and to a small number of “superstar” firms, rather than to the workforce at large. Government will need to counter this tendency with policies to broaden capital ownership, and increase the bargaining power of workers, as well as ensuring that workers are able to renew their skills.

Soaring executive pay is not inevitable. But it will take a combination of targeted measures to change the way pay settlements are reached, and much more ambitious interventions to change the balance of power in the economy, to bring CEO pay back down to earth – and lift the wages of the vast majority of workers on which the economy depends.

Catherine Colebrook is the chief economist at the IPPR thinktank.