By the fourth of January this year, Britain’s captains of industry had already pocketed more money than the average earner will have taken home by the end of the year. The median worker in the UK earns £29,574 per year, but on £3.9m, the median FTSE 100 CEO earns more than that in three days.
What’s more, top chief executives have seen their pay rising sharply in recent years. Their median pay rose by 11 per cent last year while their average pay rose by 23 per cent, to £5.7m (the fact that the average is higher than the median means even within this group, the richest are becoming better off). Meanwhile, much of the workforce faces stagnating wages and insecure employment conditions. For many in the UK, wages have not yet returned to levels reached before the global financial crisis in 2008.
The rapid rise in income for those at the top of the scale and the suppression of pay for everyone else has driven a gulf through our businesses and society, and bred resentment among working people. On top of this, high-quality jobs that offer rights and benefits have diminished to be replaced by zero-hour contracts, self-employment and agency work.
As a nation we are also becoming less smart, as investment in skills and training for adults declines.
According to a report by the National Institute of Economic and Social Research (NIESR), the percentage of 16-65-year old employees participating in learning activity has been on a downwards slope since 2000. With Brexit looming, employers are becoming increasingly concerned that they will not have access to skilled workers from the European Union once we leave.
However, I would argue that employers are part of the problem themselves and that is partly to do with the way we pay them. Chief executive remuneration has evolved into a complex business in the past 20 years. Top bosses are now rewarded for their work in a number of different ways – only one of which is salary and that is usually the smallest part of the overall package.
The rest of their pay usually comes in the form of shares in their company or share options (more common in the US). Much of this is tied to performance conditions that the bosses have to meet. These performance conditions often include a reference to the share price, or a measure called total shareholder return. This is the increase in value of the shares plus dividends – the total benefit that will go to the owners of the shares.
Top bosses have huge incentives, then, to boost their own shares – they are big shareholders themselves (from accumulated shares gifted to them over the years) and they are required to perform in a way that increases the returns for investors. Their own incentive plans run over three to five years, which – although they are called “Long-Term Incentive Plans” – is not a long time in the life of a company.
There are not many reliable options for a CEO to influence the share price in the short term; they are hostages to world markets, economic trends and national political developments. But one thing they can do is to hold down costs at the company. This will increase profits and, therefore, share value.
One of the biggest costs is workforce wages, which is one reason for stagnating pay for the average worker. Another expense is the training and skills budget, and investment in capital equipment.
British industry has a very poor track record of investment in both the training of its workforce and in new equipment. This is one theory as to why our productivity has been so low in recent years.
Andrew Smithers, the respected City economist, argues in his book Road to Recovery that the change in management pay in recent years has stifled productivity through a lack of investment. “The arrival of the bonus culture has therefore shifted the decisions of management away from investment.
The fall in investment has caused a dangerous decline in the rate at which productivity improves,” he wrote in a recent paper on corporate governance reform.
The UK’s productivity has fallen dramatically behind the rest of Europe and economists have long been debating the causes. Of course, a skilled workforce can be a company’s biggest asset and many a captain of industry will extol the virtues of their employees in the company’s annual report. But the reality is that short-termism among British bosses, driven by their focus on the share price, has seen training programmes pared to the bone.
The apprenticeship levy was aimed at improving the state of vocational training in the UK and employers with a wage bill of more than £3m annually are required to put 0.5 per cent of their payroll costs into a training fund. But many businesses say they have no faith in the training system and expect much of their funds to go unspent.
While more young people are going to university, the further education and training sector has been starved of funding in recent years and many working in the sector are disillusioned. The NIESR report also showed a rise in the number of people doing very short training courses and a decline in the number of those working towards a vocational qualification.
“The changing pattern of skills investment is indeed reason to be concerned because employers looking to fill technical and associate professional roles, for which intermediate technical qualifications are needed, are seeing a decrease in training in the relevant skills,” said the report.
We are all expected to be working a lot longer than previous generations, but over a lifetime of rapidly changing technology and business practices, our skills can swiftly fall behind. With labour so cheap, employers often prefer to hire new people rather than to invest in and update the skills of existing employees. If training is available for new workers, they often have to pay for it themselves.
It is short-sighted and could well leave businesses without the requisite skilled workforce to compete in a global world, particularly once we leave the EU’s single market. The current system of performance-related pay for chief executives and their share price fixation has helped to drive this trend. It is yet another reason why we need urgent reform of pay at the most senior level.
Deborah Hargreaves is director of the High Pay Centre and addresses the issue of top pay in her book, Are chief executives overpaid? Available now from Polity Press.