by Sam Bright
Before reaching such heights himself, Peter (now Lord) Mandelson declared himself ‘intensely relaxed about people getting filthy rich’. This came with an oft-unquoted caveat, ‘so long as they pay their taxes’, which is a fair summary of conventional political wisdom across the mainstream of all British parties from the advent of New Labour to its loss of power in 2010. The belief was that people must be allowed, indeed encouraged, to earn as much money as possible, and that such individual success will lead to greater prosperity in society as a whole, through a combination of the ‘trickle-down effect’ of capitalist endeavour, and the redistribution brought about through progressive taxation.
This received wisdom is coming under increasing scrutiny, and not just from the traditional ‘left’.
The report by the independent review of fair pay, led by Will Hutton and commissioned by the coalition government, examined the issue of ‘fair pay’ in the public sector. It recommended the adoption of ‘a framework for fairness in public pay:
This framework should be based on the principle of fairness as due desert: reward should be proportional to the weight of each role and each individual’s performance; should be set according to a fair process; and should recognise that organisations’ success derives from the collective efforts of the whole workforce. This fairness framework will ensure that senior pay in public services is fair and seen to be fair, and will preserve the ability of public services to recruit talented individuals while reassuring the public that their tax money is not being unfairly creamed off by ‘fat cat’ public sector executives.
Though these conclusions were limited (by the report’s terms of reference) to the public sector, there is every reason to ensure that similar principles of fairness are observed across both public and private sectors.
There is a clear need to extend such principles beyond the public sector to the sector that drives our prosperity and economic growth, the private sector. The High Pay Commission notes that, for example, at BP in 1980, the lead executive earned 16.5 times the amount of the average (not lowest) paid employee: in 2011, that multiple had increased fourfold to 63.
This is far from exceptional: in the financial sector, for example, at Barclays and Lloyds Banking Group, the lead executive now takes home pay equivalent to the earnings of 75 of their average employee: in 1979, they earned pay equivalent to (respectively) a mere 14.5 and 13.6 average employees. The Commission also highlights that in 2010-11, at a time of economic slowdown, executive pay in the FTSE 100 increased by an average of 49%, whilst the average employee saw their pay increase by only 2.7%.
It seems unlikely that over the past year, executives have increased their contributions to their organizations at a rate 16 times greater than their employees.
Such increasing inequalities are hardly justifiable. As Will Hutton argues in his book Them and Us, they are leading ever more surely towards ‘social apartheid’, a ghettoization of rich and poor into separate geographical, economic and cultural communities. Fuelled by vastly unequal rewards for productive work, this ‘apartheid’ cannot be explained away as the necessary but painful corollary of maintaining a competitive economy.
The iniquities of our remuneration systems are increasingly noted by politicians across the political spectrum. The Telegraph reports David Cameron as calling for more shareholder oversight of executive pay, with their recommendations as to compensation becoming mandatory rather than merely advisory (as they are presently). This chimes with similar calls from Vince Cable, the Business Secretary, and calls from Will Hutton (chair of the independent Fair Pay Review) and the Labour Party for an employee representative to be placed on the remuneration commission of every company in a drive to increase transparency.
These are tentative first steps in the direction of establishing a fairer pay structure throughout our society. More is needed: these measures alone will do little to reduce the gaping inequality between the wealthiest and poorest in our society, an aspiration that is far from unrealistic and is a necessary component of achieving greater social mobility and higher average standards of living.
The principles underlying our approach to pay are in need of substantive revision. The most basic principle is that pay should not exceed that which is proportionate to individual productivity; no person should earn more than they contribute to an organization. This principle is, in theory, already accepted. However, in the largest banks and corporations we see something of a ‘market failure’ in the employment market, caused by a lack of information and the unwillingness of institutional and individual shareholders to exercise powers (and responsibilities) of ownership.
In addition to this principle of proportionality must be the recognition that ‘no man is an island’. The reason why most hedge fund managers, corporate CEOs, and other influential business and industrial leaders overwhelmingly come from and live in developed (or rapidly developing) nations is not that such nations breed inherently more successful individuals. It is rather due to the structure of the society in which they live. They benefit from public goods such as education, infrastructure, and access to markets. Their personal success is, in large part, derived from personal endeavour; but a significant and generally necessary element of this success also grounds itself in the contributions made to their society by millions of others, working in jobs that are less well remunerated but not less fundamental to the success of those individuals. Teachers, doctors, waste-disposers, electricians, IT experts, and many more: without these, Richard Branson, Warren Buffet, Sir Phillip Green and others would not have been in a position to reap a fraction of the rewards that they have.
Society’s role in wealth and opportunity generation must be recognized in the principles underlying remuneration. Pay should reflect individual productivity and endeavour: but it should also acknowledge that such endeavour is impossible without the support of those lower in the corporate structure, and without the framework of a society in which people perform a myriad of different roles.