The wrong approach to business pay
The Government’s proposals on corporate governance are foolish and wrong. We understand their motives. The credit crunch spread doubt in finance capitalism, while rising inequality smacks of unfairness. Brexit, say some commentators, was in part a vote on an economy that does not deliver for all. But the solution to Britain’s problems lies in probusiness policies and encouraging aspiration. Especially, that is, in the context of Brexit, when the UK needs to attract investment. In the Autumn Statement, Philip Hammond said: “My priority as Chancellor is to ensure that Britain remains the number one destination for business.” How on earth would meddling with business pay do that?
Theresa May’s plan includes forcing the publication of CEO/average employee pay ratios, which are nobody’s business, possibly putting workers on renumeration committees and letting shareholders veto pay packages. It is extraordinary that having condemned Ed Miliband for proposing a similar agenda in 2015, and lauded the Tories for opposing it, we now find ourselves cautioning a Conservative Prime Minister against what sounds a lot like socialism. The comparison has been made on other policies, too. In October, when Mrs May was reported to favour state action on energy prices, Mr Miliband tweeted, ironically, that it was “Marxist, anti-business interventionism”.
The intentions behind such ideas might be good, but the consequences will inevitably be bad. Yes, executives can command very high salaries. But big pay is necessary to attract big talent, and the money can always be taken away. If an executive fails at their job, the company will generally do badly, and they will be fired. This is how the free market is supposed to work. It can be ruthless. But it is the system that delivers best to customers and, by so doing, generates a profit that can be passed on to the workforce.
Government intervention will distort the market. It will drive talent overseas. It will hurt the consumer. It will damage business performance and lead to fewer jobs and lower pay for all. That is a lesson from history that anyone with memories of the Seventies will recall. Now is the time not to retreat into socialist romanticism but to shape an economy that can compete outside the EU – a deregulated economy flexible enough to flourish in the global marketplace. The best that the state can do to help workers is to get out of their way.