Chief executive pay continues to skyrocket

Share­hold­er and pub­lic out­rage over exor­bi­tant chief exec­u­tive pay has sim­mered away unheed­ed for years. Occa­sion­al­ly investor indig­na­tion boils over. This year, BT, Roy­al Mail, Shell, AstraZeneca, Per­sim­mon and William Hill were among firms that faced share­hold­er revolts at their AGMs.

Now, under new leg­is­la­tion com­ing into effect in 2020, the UK gov­ern­ment will demand that large list­ed com­pa­nies pub­lish and jus­ti­fy the pay gap between their chief exec­u­tives and staff. But will pub­li­cis­ing the pay gap help to close it?

CEOs earn more in one work­ing day than the typ­i­cal work­er earns in a year

Chief executive pay rising quicker than US stock prices

In 2017, the chief exec­u­tives of the UK’s biggest list­ed com­pa­nies were on aver­age award­ed an 11 per cent pay increase com­pared with an aver­age 2 per cent rise to work­ers over the same peri­od, push­ing their medi­an remu­ner­a­tion to £3.93 mil­lion, accord­ing to the stew­ard­ship ser­vice Min­er­va Ana­lyt­ics.

In the Unit­ed States, the pay-rise gap was wider still. The aver­age chief exec­u­tive of the 350 largest firms received an eye-water­ing $18.9 mil­lion, a 17.6 per cent increase on 2016, while the typ­i­cal work­ers’ salary bare­ly shift­ed, increas­ing just 0.3 per cent, accord­ing to a recent study by the Eco­nom­ic Pol­i­cy Insti­tute (EPI) think tank.

Chief exec­u­tives’ com­pen­sa­tion has grown faster over a 40-year peri­od in the US than stock prices or cor­po­rate prof­its. Their com­pen­sa­tion rose by 979 per cent, based on stock options grant­ed, or 1,070 per cent, based on stock options realised, between 1978 and 2017, com­pared with 11.2 per cent growth in the aver­age worker’s com­pen­sa­tion over the same peri­od, the EPI says.

These cumu­la­tive pay ris­es have cre­at­ed a widen­ing chasm between chief exec­u­tive com­pen­sa­tion and the aver­age work­er. In 1965, the chief exec­u­tive-to-work­er com­pen­sa­tion ratio was 20:1. Today it is 312:1, more than five times greater than in 1989 when the ratio was 58:1.

Arguments for pay gap between CEOs and workers

“One way to pic­ture the 312:1 ratio is to con­sid­er that there are 260 work­ing days in a year; CEOs earn more in one work­ing day than the typ­i­cal work­er earns in a year,” says Lawrence Mishel, co-author of the study and dis­tin­guished EPI fel­low.

Even the pay gap between chief exec­u­tives and very high wage earn­ers is sub­stan­tial. Chief exec­u­tives in large firms earn 5.5 times as much as the aver­age earn­er in the top 0.1 per cent. Yet chief exec­u­tive pay also sets a prece­dent for high exec­u­tive pay uni­ver­sal­ly, in pub­lic and pri­vate firms, includ­ing non-prof­it organ­i­sa­tions and hos­pi­tals. “This dri­ve upwards is a major fac­tor behind the growth of top 1 per cent incomes,” says Mr Mishel.

Some econ­o­mists jus­ti­fy chief exec­u­tives’ stratos­pher­ic pay ris­es by point­ing to their company’s rise in stock prices. If a company’s stock price is increas­ing, then its chief exec­u­tive must be doing a good job, the argu­ment goes. Mr Mishel ques­tions whether this hypoth­e­sis holds true in a peri­od of inflat­ed val­ue across the whole stock mar­ket. More per­ti­nent, he says, is the company’s stock per­for­mance rel­a­tive to oth­er com­pa­nies.

Most dubi­ous of all is the award­ing of chief exec­u­tive pay ris­es when the firm has achieved nei­ther an increase in pro­duc­tiv­i­ty or prof­its. “If CEO com­pen­sa­tion does not cor­re­spond to an increase in the firm’s per­for­mance, it is a so-called rent,” says Mr Mishel. “CEOs are receiv­ing a big­ger slice of a pie that does not grow, mean­ing there is not enough pie for oth­er peo­ple.”

Pay gap drains worker morale

This mat­ters not just because it is egre­gious­ly unjust, but because it affects work­er morale. In the 1980s, Peter Druck­er, the father of man­age­ment the­o­ry, reck­oned that a chief exec­u­tive-to-work­er pay ratio exceed­ing 20:1 would sap morale. Now some are begin­ning to con­sid­er whether out­sized chief exec­u­tive pay is part of the pro­duc­tiv­i­ty prob­lem. Why would a work­er gen­er­ate more wealth when it is grabbed by those high­er up the pay chain at a rate that increas­es year on year, while the worker’s share shrinks?

If this is the case, then pub­lish­ing pay ratios is a mod­est step in the right direc­tion, but is it enough to solve the prob­lem? With­out board­rooms pulling in the reins, there is no stop­ping run­away chief exec­u­tive pay, argues US sen­a­tor Eliz­a­beth War­ren and TUC gen­er­al sec­re­tary Frances O’Grady, who have called for pro­vi­sions to place work­ers on board­room pay com­mit­tees. “That would bring a bit of com­mon sense and fair­ness to deci­sion-mak­ing when board­room pay pack­ets are approved,” says Ms O’Grady.

Is there more that gov­ern­ments could do? Mr Mishel is opposed to gov­ern­ment-imposed pay caps, but he does believe that low tax rates have cre­at­ed incen­tives for the chief exec­u­tive-to-work­er com­pen­sa­tion gap to widen.“Most econ­o­mists believe that the low tax rates helps push the demand for high­er pay,” he says. “If a high mar­gin­al tax of 70 per cent was imposed on very high income earn­ers, then it wouldn’t be that use­ful for a CEO to push for high­er pay because most of the increase would go to the Trea­sury.”