Time to mind the executive pay gap
THOSE of us who believe the chasm i n pay between executives and the rest of the planet is too wide can take heart this week.
Regulators in the US – a nation often cited as being much more comfortable with the rich than we are – have said firms must disclose their pay gap. As a result, they will be open to questioning from investors, workers and politicians on why the gulf is so wide.
Where the Americans lead, we follow. So this is a big boost for campaigners in the UK who would like companies here to be compelled to reveal the ‘pay ratio’ in their annual report.
The ratio in the UK stands at an average of 149:1 for the FTSE 100, though that masks a wide range, from 10:1 at the company with the narrowest gap to 780:1 at the one with the widest.
Over the crisis years, the distance between CEOs and workers grew: it was ‘only’ 120:1 in 2009.
Many corporate leaders are resistant to disclosing just how much more they are paid than a typical worker, and it is not hard to see why. The sheer scale of the gap is likely to come as a shock to employees and customers.
Recent research by Populus found that two-thirds of people would support a ‘maximum wage’ limiting executive pay to no more than ten times the average, which is pitifully wide of the mark, being less than a tenth of the multiples actually being received.
The debate has until now been confined to the narrow question of whether top bosses ‘deserve’ it, in terms of their performance for shareholders. Often, they don’t.
But they carry on receiving bloated packages because the only yardstick is their peer group, and the terms of discussion are set by remuneration committees and consultants, with no voice for employees or customers.
Forcing companies to reveal the pay gap would put rewards in a broader context. One does not have to be on the Jeremy Corbynite left to see this is no bad thing.
Steve Hilton, a close ally of David Cameron, this summer called on companies to pay a living wage and to end ‘completely outrageous’ levels of low pay.
He correctly said the Government would not have to pay so much in tax credits if firms paid proper wages. There is no reason the taxpayer should subsidise corporate profits.
Pay at the very top is only one part of the picture: it needs to be viewed alongside low, medium and even pay that by any other standards is very high.
The average FTSE 100 CEO earns £4.9m – around 180 times as much as national average earnings. It is 32 times as much as someone on a taxable income of £150,000 – a doctor, lawyer or accountant, say – who would be in the top 0.5pc of taxpayers.
Boardroom pay is pulling away not only from those in the middle and at the bottom, but also from other well-paid individuals. We should be questioning why and whether it is in any way justified.
Particularly because, while executives continue to receive superhuman rewards for all-toohuman performance, it will be impossible to restore public trust in business.
Industrial deal
HEDGE fund ValueAct has stirred spirits on the UK stock market by taking stakes in Rolls-Royce and Smiths Group. Why the sudden interest in British industrial stalwarts?
Much as it would be nice to think investors are recognising the value of manufacturers thanks to George Osborne’s efforts to lead a March of the Makers, the answer lies in arcane pension fund accounting, of all things.
One impact of low interest rates and Quantitative Easing has been to swell pension deficits, which bedevil many manufacturers. (Strictly for the geeks, this is why: when companies calculate how large their pension commitments will be, they use a notional rate of return based on interest rates. The lower the interest rate, the bigger the liability.)
Pension black holes have been a deterrent to takeovers at industrial groups but when interest rates go up, as they are expected to shortly, the pension deficit is less of an obstacle. Voila!
Whiplash effect
THE Government and insurers are under attack for the 9.5pc premium tax that will push up the cost of cover. Fraud, however, is an even bigger cost.
Whiplash claims – many of them bogus – add £93 a year to the average annual motor premium, according to Mark Wilson, the chief executive of Aviva. Stephen Hester at RSA puts it another way: British motorists pay double their counterparts in France and Germany, where the false claims culture has not caught on.
Diddling insurance companies is far from being a victimless crime. Honest policyholders pay the price.