Executive pay has risen to nearly 180 times that of the average worker according to a report by the High Pay Center at a time when Britain’s average wage squeeze is getting tighter. Back in late 1990s, UK executives were earning 60 times more than average workers. According to the report, the typical annual pay for a FTSE 100 chief executive has increased from around £100-£200,000 in the early 1980s to just over £1 million in the early 2000s to £4.3 million in 2012. This represented a leap from around 20 times the pay of an ordinary worker in the 1980s to 60 times in 1998, to 160 times in 2012.
Interestingly, the report says that the remuneration committees that determine executive pay at top companies are made up primarily by serving or former CEOs who are likely to be instinctively sympathetic to other CEOs. In 2012 46% of remuneration committee members were serving or retired executives, who in their majority (90%) had a background in business or financial services.
Pay Gap Needs to be Addressed With Radical Reforms
The High Pay Center has urged the Government to take radical action to bring the pay gap to more proportionate levels. The Coalition Government imposed new rules empowering FTSE 100 company shareholders to vote over directors’ pay, which means that 50% of shareholders must approve a policy before it passed.
However, this measure was not sufficient to bring about positive change as most of shareholders favour the company policy on top pay, with the recent case of Burberry being the exception of the rule. Last week, 52% of shareholders rejected the proposed pay package for the fashion house’s directors.
Deborah Hargreaves, the centre’s director, said: “It’s time to get serious about tackling the executive pay racket. The government’s tinkering won’t bring about a proper change in the UK’s pay culture. We need to build an economy where people are paid fair and sensible amounts of money for the work that they do and the incomes of the super-rich aren’t racing away from everybody else.”
Public Perception of an Executive ‘Elite’ Damages Trust in Business
The fact that executives’ pay is set by remuneration committees which stem from the corporate sector, makes it harder for ordinary people to believe that executive pay objectively reflects how hard people work or the value they add. The people who set the remuneration packages for CEOs, are all part of the high pay culture, so have little interest in challenging the state of affairs.
However, pay inequality undermines faith in business. Perceived executive greed as well as malpractices on pay can be harmful to a company’s reputation, while wider pay gaps between workers can be a cause of resentment and conflict in the workplace
Low Wage Growth Plagues Britain’s Economic Recovery
Meanwhile, wage increase for average workers fails to pick up to satisfactory levels and young people are severely affected by persistently shrinking wages. Average weekly pay (including bonuses) in the three months to April increased by just 0.7 % year-on-year. This marked a decrease of 1.9% in the three months to March.
Frances O’Grady, general secretary of the TUC union, commented "It is becoming harder for people to get by as average wages continue to fall behind the rising cost of living. Ministers may have moved on from Britain’s living standards crisis but it’s still the top concern for families…An economic recovery based on shrinking pay packets is not one built to last."
Overall, the pay gap between executive and average worker seems to have soared significantly over the past 24 years. In finding solutions to the issue in question, new radical steps need to be taken to ensure a fairer and more proportionate executive pay. One of these steps could be the inclusion of workers’ representatives on remuneration committees to bring a degree of ‘real world’ perspective on executive pay decision making.
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