Stop runaway executive pay: rewarding performance proportionately
Soaring executive pay is a symptom of a corporate culture that is losing its grip on reality. Tom Wills and Fiona Gooch look at the links between responsible business, inequality and executive pay, and ask what can be learned from Traidcraft’s salary ratio.
More than 80% of the UK thinks that the gap in income between the richest and the poorest is too large.
UK trust in business runs at just 35% among those in the lowest income brackets.
In 2016, FTSE 100 bosses were paid 140 times the salary of their average employee.
The three above statements are clearly linked. Executive pay has soared over the last twenty-five years, and is often cited as a symptom that businesses are losing sight of their broader responsibilities to society and their community, and are instead operating in a world of mutual backslapping and enrichment.
We’ve had bold statements from the Prime Minister, who has announced her intention of “ensuring that executive pay is properly aligned to long term performance, giving greater voice to employees and consumers in the boardroom”. Traidcraft Plc. was set up to demonstrate that business can be a huge force for good, and that the benefits of success can be felt by everyone from suppliers and consumers to the community and employees.
We would go further than Theresa May and say that if businesses and society are going to thrive together there needs to be a serious reassessment of high pay culture. Our thoughts for achieving this were laid out in our response to the government’s Green Paper on Corporate Governance reform, and are summarised below.
Traidcraft’s salary ratio
Traidcraft Plc. and its sister charity Traidcraft Exchange have a shared policy that employees are paid within a maximum salary ratio of 1:6 for UK staff. This means that our Chief Executive Officer cannot be paid more than six times the Full Time Equivalent wage of the least well-paid member of staff.
This ratio is part of Traidcraft’s commitment to doing business in an ethical and responsible way, and demonstrates that we recognise the value of all the staff that contribute to our success. We think this is a great way of ensuring that the success of a business is felt across all its employees, rather than just in the boardroom. National and global economic inequality is rising all the time, and a salary ratio seems a sensible and modest measure to prevent the chasm between the richest and poorest opening further.
Being transparent about pay
There is little prospect of the world’s largest companies copying Traidcraft’s salary ratio any time soon. However, being more transparent about the relative size of pay packets might be a good first step towards a culture in which high pay is justified rather than expected.
Of course, many companies publish the size of their CEO’s pay packet (and the High Pay Centre compiles a useful annual summary). Taken in isolation, this information can end up fuelling a race to excess, with directors demanding ever greater sums in competition with their peers.
Companies should therefore publish their highest, lowest and average salaries, including agency workers as well as direct employees. This would highlight the most egregious disparities in pay and encourage scrutiny. Some companies are beginning to release their salary ratios, although the preferred formulation is to contrast average salary against highest salary. This can be a useful metric, but deliberately ignores the least well-paid. A government concerned with modern day slavery in the workplace should be interested in the situation of the lowest paid workers.
Furthermore, many companies that report a wage ratio outsource some of their lowest paid functions. Excluding agency worker pay from reporting may skew the data and present a misleading picture of relative equality. This is distasteful, especially since many of the agency staff in question will work on a regular, long-term basis for that company, and will perform functions that are vital to day-to-day operations such as cleaning, security or receptionist work.
Justifying high pay
If the government is serious about tackling high-pay culture, and re-establishing a meaningful relationship between performance and reward, it should look at ways of making companies justify very high pay to shareholders and the public.
An obvious first step should be to ensure that pay is justified based on available objective assessments of a directors’ success against their duties as set out in company law (and explained in a previous blog).
Among the independently collected metrics that might be used are legal judgements, reports from a relevant industry regulator or ombudsman and fines from the Environment Agency or Health and Safety Executive. There are also sector-specific sources of information, such as the UK Groceries Code Adjudicator’s annual supplier survey (for the supermarket industry) or forthcoming surveys carried out by the International Labour Organisation into purchasing practices in the garment sector (for the many UK retailers that buying clothes from overseas).
More imaginative methods might also be worth considering. What about pay packets of more than £1 million being justified by the potential recipient via an advert in a national newspaper, or in front of a panel of external stakeholders? An alternative threshold could be if an individual’s pay exceeds 50 times the lowest paid worker of a company. This wouldn’t stop people being paid a large amount of money – and neither would that necessarily be a desirable outcome. However, it might certainly make businesses think twice when casually paying huge salaries when such funds could be spent giving a wage increase to the least well-off, improving the environmental or social impacts of a company or investing in business growth.
These are not our hard and fast proposals. Rather, they are some thoughts for how business can be encouraged to play a more responsible role in supporting greater economic equality. Given the emphasis that Theresa May has placed on this agenda, we look forward to seeing her own plans in the Conservative election manifesto.
Traidcraft Exchange’s full response to the government’s Green Paper on Corporate Governance Reform can be found here.