How did the gap between CEO pay and that of ordinary workers get so wide?
“Fair pay, affordable bills, enough to eat and a decent place to live. These aren’t luxuries—they are your rights.” These words from trade union leader Dave Ward in support of the Enough is Enough campaign, launched by unions and community groups earlier this year, point to a country in crisis. A YouGov poll shows that four in 10 people said they struggled with food and energy bills this spring. This winter, one million more people are expected to fall into poverty. Only those at the very top will be insulated from the pain of inflation running at around 10 per cent while wages don’t keep up.
Enough is Enough is lobbying for pay rises funded in part through higher taxes on the rich. It wants to push back against a society that it says is run only for a wealthy elite. And it seems the campaigners may have a point: according to the OECD, the UK has the second-highest income inequality of G7 countries (only the US is worse). While the rich are getting richer—the wealth of the 20 richest UK households on the Sunday Times rich list increased by £24bn between 2021 and 2022—the poor struggle to eat. The Trussell Trust, a network of food banks, has seen an 81 per cent increase in need for its emergency food parcels in five years, delivering over two million between April 2021 and March 2022. These facts, in a rich country, should shame us.
The approach of prime minister Liz Truss and her government is a stark contrast to this reality. On entering office Truss said that the UK, governed by her Conservative party for the past 12 years, has been too focused on redistribution and not enough on growth. In September, the chancellor Kwasi Kwarteng announced in a mini-budget that he wouldn’t raise raxes on the rich but will instead scrap the top 45p tax rate for earners of more than £150,000 a year. The approach caused sterling to plummet and will cost £2bn every year.
Of course, there are always winners. The tax cuts will disproportionately benefit the country’s highest earners. Many will be used to such treatment: since the 1980s, the gap between the top and median pay at the UK’s top companies has grown. CEOs and other executives have seen a sharp rise in incomes, dividends and bonuses while employment conditions and standards of living for everyone else have been eroded. In the space of a year alone, the median pay of FTSE 100 chief executives increased by 39 per cent, from £2.5m in 2020 to £3.4m in 2021.
It shouldn’t have to be this way. It is not an inevitable consequence of late-stage capitalism that the lion’s share of rewards is channelled to the top—rather, it is the outcome of decisions made over the years by policymakers and top bosses. The discipline of the market supposedly drives economies to be efficient. But when they are not delivering for most people, something has gone wrong. How could we do things differently?
I have been asking this question for 12 years, since I headed the independent High Pay Commission inquiry into top incomes in 2010. We were tasked with examining the corporate excesses of the New Labour years, when Peter Mandelson famously said he was “intensely relaxed about people getting filthy rich as long as they paid their taxes.” But we didn’t envisage the dystopian era to come, as first the Conservative-Liberal Democrat coalition and then subsequent Tory governments presided over a decade of anaemic economic growth and squeezed wages while bankers and executives raked in multi-million-pound rewards.
In 2012, I stepped back from my career as a business journalist and set up the High Pay Centre as a research and campaign group looking at top incomes, pay ratios and corporate governance. The data in this piece comes from its work. In the wake of the financial crisis, and in face of public anger about bankers’ bonuses and high executive awards, the government introduced rules requiring large listed companies to be more transparent about pay. Since 2013, companies in the FTSE 100 and FTSE 250 indices— together known as the FTSE 350—have been required to publish their CEO’s pay as a single figure, and since 2020 have had to publish the ratio between the top and median paid employees.
These changes were designed in the hope that shareholders would pressure boards to do better—instead, executive pay has spiralled. Investors were slow to act and reluctant to rock the boat.
Some pay ratios are now vast: Frederic Vecchioli, CEO of the storage company Safestore, received a pay package 656 times bigger than the median full-time UK worker at his firm in 2021. He was paid £17m—more than any other CEO in the FTSE 350—while workers in Safestore’s lowest-quartile of UK pay received £23,502. Safestore’s median pay ratio of 656:1 is the biggest of all FTSE 350 companies. Across the FTSE 100 in 2021–22, chief executives were paid on average 109 times the pay of the median worker.
This grossly exceeds what the public thinks is fair. According to a recent survey by the High Pay Centre, more than 60 per cent of people think that chief executives should be paid only 10 times the average salary. Why should the boss of retailer Next, for example, be worth 245 times the income of a shop worker or warehouse assistant? Is the boss of Sainsbury’s working 183 times harder than someone on the shop floor?
Such concentration of wealth at the top of UK society is unfair, starves the economy of spending and has the potential to change our politics too—nudging people disillusioned with the status quo towards populists’ promises of simple solutions. It has also undermined the public’s faith in business. The High Pay Centre’s survey also showed that 49 per cent of respondents believe that business behaves in a way that is generally detrimental to society. Interestingly for Truss, it also showed that more than half of people believe that redistributive economic policies would be much more likely to improve the struggles of those on middle to low incomes than measures aimed at lifting economic growth.
Of course, companies cannot be run by public opinion, but businesses in the public eye do need a licence to operate. They depend on the public as customers, service users and workers. When the public is hostile to business, it challenges it—take the current Don’t Pay UK campaign instructing people not to settle their energy bills in October. As levels of anger build and Britain faces a new winter of discontent, people are increasingly calling for more radical action.
Admittedly, we have been here before. After the financial crisis, there was outrage about the bonuses that bankers were receiving before they crashed the economy. That anger was short-lived—some banks were shamed into showing restraint for a few years but it was soon off to the races again. One of the striking moves in the September mini-budget was Kwarteng’s decision to scrap the cap on bankers’ bonuses, a measure imposed by the EU after the financial crisis.
Similarly, there was much rhetoric at the height of the Covid pandemic about the value of key workers and their herculean efforts to keep public and essential services running in lockdowns. The government urged the public to clap for key workers and promised it would “build back better” by investing in infrastructure and skills. Ministers voiced willingness to consider improved working conditions. Increases in executive pay—which had boomed since the 1980s—were temporarily restrained as businesses resorted to government handouts. Many bonuses went unpaid and overall median CEO pay packages slipped to £2.5m.
This solidarity did not last long either. The pay gaps between bosses and workers which had temporarily shrunk during the pandemic began to sprawl once again. Research by the Trades Union Congress and High Pay Centre found that the pay of the median FTSE 100 CEO rose by £1m between 2020 and 2021. They weren’t necessarily working harder—their incentive plans and bonuses simply paid out as the economy bounced back.
As the economic squeeze on workers intensifies, solidarity again seems lacking. The country’s biggest companies could afford to give their staff wage increases—by the end of 2021, the profits of non-financial firms were up an average of 34 per cent on pre-pandemic levels—but the governor of the Bank of England has warned against large wage settlements for workforces, which he says could entrench inflation in the economy. As ever, this argument is not applied to those running companies—only those working for them, or in the public sector.
This inequality isn’t as bad everywhere else. This contrast between top pay awards for executives and the miserly settlements urged on the rest is a particular feature of Anglosphere capitalism. The hero worship of chief executives that began in the neoliberal economy of Ronald Reagan’s America spread through the 1980s and 1990s to the UK. Different corporate governance structures in Germany, Scandinavia and to a lesser extent France have all given a bigger voice to the workforce and largely kept a lid on stratospheric top awards. Typical CEO pay is around 17 per cent higher in the UK than in similar sized companies in Europe.
At the High Pay Centre, we have long advocated for companies to adopt corporate governance changes that would give more voice to workforce concerns, including a say on top pay. We have pressed for the inclusion of members of staff or the wider workforce on boards and remuneration committees. But now I think we are long past the stage where simple tweaks to corporate governance would fix the issue and lead to a fairer and more equitable distribution of income. Inequality has become too entrenched.
We need to re-evaluate the way our economy is structured. We need to shift the focus from growth as a metric of success and move to more climate-conscious models, such as the doughnut economy as espoused by Kate Raworth. But efforts at reform have been ignored. Those at the top of the pay scale appear to be comfortably stuck in an inexorable growth spiral, as their packages far outstrip inflation.
The argument often given to justify the largesse of CEO pay packages is that incentives for financial performance and share-based bonuses will encourage chief executives to behave like shareholders. In reality, corporations are complex beasts, and it is hard to strip out which aspects of corporate performance are attributable to the boss alone. When an executive’s pay does depend on achieving particular goals, the metrics are generally based on financial or share-based measures—they’re focused on the bottom line. Few, if any, measures of a chief executive’s performance are tied to employment conditions, staff welfare or environmental measures.
The bosses themselves are almost trapped in a gilded cage. No one wants to break out—and why would you, when a few years of work would leave you and your family independently wealthy without the need to work ever again?
Of course, many chief executives are motivated by so much more than money. They are concerned with building a company and leaving a legacy. But their tenure at the top will be short, and it is all too easy to introduce share buyback schemes that temporarily boost the stock price without any lasting investment success. Why bother to improve the skills of your workforce or invest in new gear when this will take many years to show any effect? British business is plagued with a short-termist mentality, closely related to the way executives are paid.
During my decade of arguing for fairer pay structures, I have become disillusioned with the slow pace of change. Initially, I believed that if structures were set up to restrain pay—for example by having workers on boards and remuneration committees—this would have a longer-term effect. I no longer believe this. I am now in favour of more radical interventions and am convinced that business will not act of its own volition. Until they are forced to change, executives will continue to accept generous payouts. Only when the people wielding pitchforks are at the door will they relinquish their yachts and private jets.
The tax solution
One answer may lie in ongoing arguments in the UK about tax. Even before the latest round of tax cuts, high earners in Britain were taxed lightly when compared with continental Europe. Instead of seeking to minimise our tax payments, commentators and policymakers should make the case that tax and all it pays for are the marks of a civilised society. High-tax economies appear to be more successful in spite of the additional burden on taxpayers.
The ratios solution
When he was leader of the Labour party, Jeremy Corbyn hit on a second possible solution, proposing a maximum pay ratio for larger enterprises—meaning the highest-paid employee’s remuneration would be capped at, for example, 20 times that of the lowest paid. It’s an idea with broad appeal—one that even David Cameron flirted with when he first became Tory leader, before it was squashed by the business lobby.
As Sharon White explains, some large institutions in the UK—such as the John Lewis Partnership, which owns the department stores of the same name and Waitrose supermarkets—have imposed pay ratios on their senior managers.
Enacting this is more complex than it sounds: different sectors within a firm may have radically different pay ratios, and companies might outsource low-paid work to avoid it being included in their figures. But if it were done right, enforcing a mandatory pay ratio for all big companies would more closely align top and bottom incomes.
The bonus-sharing solution
A third option could be to scrap all financial bonuses and incentive plans unless they were made available company-wide, enabling the whole workforce to share in corporate success. CEOs shouldn’t be paid in shares—everyone should be paid in cash and in a much flatter structure across the company. If bosses want a pay rise, everyone else should get one too.
These are not overtly drastic measures and to most normal people would sound eminently sensible. Maybe the time is coming for them to have a hearing. In my initial addresses to corporate audiences at the start of the 2010s, the High Pay Centre made sound arguments for changes that could have made capitalism work in a fairer way. I suggested that companies should listen—or beware the public taking matters into their own hands. Campaigners have lobbied hard for more than a decade, with only tentative moves made by the government in response.
I fear inequality has now become dangerously unsustainable. Public opinion is, rightly, demanding bigger steps. The winter ahead could be one of desperation for many. Unrest is brewing. All I would say to the plutocrats is: you were warned.
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