Is Top Team Pay Unfair?
July 9, 2010 in Pay and Reward, Public Services
Photo: Covilha, Flickr
With the government proposing a cap on public sector pay, it can’t be helpful to see reports that, according to reward consultancy MM&K, the pay for private sector Chief Executives has continued to grow while share prices have dropped.
People Management report the total reward for chief executives in the FTSE100 is now £3.1 million a year – consigning to mediocrity the comparisons between public sector managers and the Prime Minister’s salary at a mere £150k.
During a “time of austerity” with public servants experiencing a pay freeze, senior jobholders seeing pay cuts, it is challenging to hear that FTSE100 chief executives pay is up 5% on 2008 figures – at a time when the private sector has been through so much “pain”.
The median 2009 salary increase for this group was 4% and total pay has almost quadrupled since 1998. A quarter of FTSE100 companies raised CEO pay by over 7%, though about a third had no increase or took a reduced salary. The impact on senior managers pay in both the private and public sector cannot be ignored.
During the Radio 4 programme “The Moral Maze”, “Greed, Reward, Worth”, Claire Fox, from the New Economics Foundation, highlighted the unfairness of such high pay, summarising the report A Bit Rich, which challenges the link beween societal value and reward. The HR blog HR Case Studies suggested people reading the report would be either inspired or enraged.
Drawing attention to some very challenging evidence about the impact of work, the report suggests hospital cleaners, waste recycling workers and childcare workers add significant societal value while investment bankers, tax accountants and advertising executives destroy it. The report highlights the discrepancies between this societal value and levels of earnings.
The report could be criticised for using perfect hindsight in the way it describes the destruction of societal value caused by the banking sector. More relevant to the debate on pay is a lack of any discussion about labour markets. In a market economy, people can command what other people are prepared to pay for access to their skills and experience. Broadly it’s the scarcity of skills and experience which drives earnings rather than any careful calculation of “societal value”.
Returning to CEOs, according to MM&K, high levels of pay for CEOS are the result of weaknesses in corporate governance and remuneration committees -
“We suspect that in many cases targets were lower than market expectations. A goal of remuneration strategy is to retain and motivate executives. Some remuneration committees are loath to upset their chief executives and so they permit soft targets,”
“We conclude that performance-related pay, for most companies, is not working the way that shareholders envisage. Instead, most plans are designed to generate the sorts of pay levels sufficient to keep senior executives satisfied, with only limited upside and downside for performance.”
This sounds similar to Michael Portillo’s comment, made on the Moral Maze, that bankers were paid so much because they had “rigged the market”. Anyone who has seen Michael Moore’s documentary and commentary “Capitalism: A Love Story” will recognise the concern over the extent to which rich and powerful individuals have manipulated the market for enormous personal gain.
Portillo was far more willing to accept it was clear why highly paid sports professionals and entertainers were earning so much. In these cases, he suggested, they benefited from the fact they were “exceptional people” ….. with the “one in a million voice or pair of feet”, which people were willing to pay to enjoy.
In the same programme, Daniel H. Pink provided a broader perspective, highlighting carrot and stick motivators have been shown to be ineffective at higher more complex levels of challenge, and that capping pay has no record of success in other economies – with people always finding ways to avoid such limitations.
To address pay inequalities, it would probably be necessary to take a far wider perspective than simply capping, adopting high rates of tax for top earners, perhaps considering carefully as individuals what we want our consumer spending to reward or paying more tax generally to reward people doing things we value.
Responding to questions from Michael Portillo, Pink noted workers in particular industries benefit from the commercial value generated by “the work”. Making the point, “the market is us”, he says -
“Unfairness didn’t emanate from nature, it has to do with choices, either of omission or commission, that all of us have made as consumers and taxpayers.”
At present it would seem we live in a society where people are willing to buy tickets, football shirt, music etc while they are less willing to see their taxes go up so nurses and teachers can be paid higher salaries.
How far can we seek to limit unfairness by capping pay?
Are there limits applied in your organisation?
Would it be more practical to introduce even higher rates of taxation as a means of limiting unfairness?
