Tackling extreme pay inequality must be central to securing inclusive growth

by: Wanda Wyporska, Executive Director of The Equality Trust | on: 12.04.17 | in: Business ethics, Corporate Governance

Last summer, the Prime Minister pledged to build a nation that “works for everyone, not just the privileged few”. One of her central ambitions in setting out this vision was to tackle irresponsible business behaviour that leads to “irrational, unhealthy and growing” pay gaps between bosses and workers.

The Equality Trust’s recent Pay Tracker report analysed the annual reports of FTSE 100 companies and found that the £5.3 million average CEO annual remuneration is 190 times higher than the average UK wage and 386 times higher than for a worker earning the National Living Wage. The scale of these ratios begs the question: can a chief executive really be working nearly 400 times harder than the person cleaning their office? Even taking into account greater responsibilities, there simply aren’t enough hours in the day. Top bosses are treated as talent to be retained at all costs, while the rest of us are all too often seen as costs to be reduced.

Some believe this is simply the result of a well-functioning market, and that such high pay is just rewards for high CEO productivity. But this is a difficult claim to back up. Evidence in fact suggests that luck is a strong determinant of CEO pay, with one study showing that external factors that influence a company’s worth (such as oil prices) can benefit executives’ pay packets even though they have no control over those factors. What’s more, it found that in cases where a company was unlucky, pay fell to a lesser extent than CEO rewards increased for being lucky. All this suggests an upward trend in executive compensation due to factors beyond an imagined exponential increase in their productivity and value. When millions of people who are poorly rewarded for their hard work see those at the top raking it in regardless of performance, it’s unsurprising that many workers feel demotivated. The sense that prosperity is not being shared is keenly felt.

That’s why The Equality Trust is calling for mandatory publication of pay ratios by large and medium sized companies, to provide some much-needed transparency on the pay gap between bosses and workers, and to encourage those setting pay to consider and justify such unequal rewards. We need to push businesses to reflect on how their remuneration policies contribute to the overall income inequality that so damages our society and our economy. You can sign our petition here.

This isn’t only about how companies choose to spread pay within their workforces. It gets to the heart of the much more fundamental question of why we reward some work so handsomely and yet pay peanuts for other jobs. The knowledge that FTSE 100 CEOs take home jackpot-like pay packages year in, year out, sits unhappily with the fact that care workers on the minimum wage, looking after our loved ones at their most vulnerable, get paid less than one third of a per cent of that.

Post-crash, the pain has not been evenly shared, with the austerity response to the crisis largely borne by the poorest and by women. This makes it even more pressing that we reconfigure our economy so that future gains are more evenly shared – and the sharing need not hinder the growth. In fact, the opposite is likely to be true. Heavyweight policy organisations like the IMF and the OECD have warned that inequality creates lower and less durable economic growth, and the CBI has said that:

“societies where more people share in prosperity tend to have higher GDP growth per capita and experience longer spells of growth than less inclusive economies”.

Inclusive growth clearly calls for comprehensive strategies on employment, skills, education, health and housing to tackle our economic imbalance on all fronts, but since wages still largely determine standard of living, reduced pay disparities have to be a central part of the equation. Trickle-down has emphatically not worked. It’s time we reset our system so that everyone, everywhere, shares in national growth.  As an increasing number of commentators seem to be asking, if we can’t achieve inclusive growth, what is the point of growth?

Dr Wanda Wyporska is the Executive Director of The Equality Trust.