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Fair Pay for Fat Cats?

Posted on 09 November 2011 by Nilufer Rahim, Research Director .
Tags: BSA, British Social Attitudes, Income and work, society, bonuses, inequality, unemployment, youth unemployment

Nilufer RahimWith youth unemployment surpassing the one million mark and as public and private sector employees struggle to cover the spiralling costs of living on frozen or diminished pay packets, the excesses of executive pay are being brought sharply into focus. Disquiet surrounding high pay last year resulted in Will Hutton’s Review of Fair Pay in the Public Sector and the High Pay Commission being established. Concerns have since mounted, manifesting in the current BIS consultation on executive remuneration, recent protests outside St Paul’s and the publication of the High Pay Commission's final report. 

Concerns are not unwarranted. The High Pay Commission’s recent findings show upper earnings to be way out of line with expectations. Income Data Services calculated that the average FTSE 100 lead executive took home almost £4.5 million in combined salary, bonuses and benefits in 2010. In contrast, respondents of NatCen’s 2009 British Social Attitudes Survey (BSA) gave a median estimate of £200,000 for the earnings of a chairman of a large company. When asked how much such a person should earn the amount was halved, to £100,000.

Despite underestimating the extent of high incomes 80 per cent of respondents felt the gap between high and low incomes was too large. Nonetheless the survey demonstrates clear support for pay hierarchies i.e. where company chairmen earn more than unskilled factory workers. When asked why some people earn more than others the majority equated high earnings with hard work. So according to the British public, people who earn more in some way deserve to do so.

In a small leap that makes ‘hard work’ synonymous with ‘high performance’ we see little evidence that the public’s justification for higher pay is reflected in reality. High pay doesn’t always correspond with high performance, as observable in the remuneration packages of executives of failed and bailed out banks . Bell and Van Reenen estimate that, at most, performance accounts for half FTSE 350 CEO’s pay increases over the past decade. Although critical of ‘paying for failure’ Bob Diamond, on Radio4, cited ‘operating competitively’ as a key reason for high pay.

Will Hutton’s fair pay framework demands clearer links with performance, greater accountability and transparency. It also argued for better staff representation on remuneration committees. This could help rectify the problem if it made sure a full range of views from across the pay spectrum achieved better consensus on what constitutes fair pay and reward. Another helpful move could be David Cameron’s pledge to increase shareholder power in deciding pay and bonuses of senior executives (providing shareholders with a vote to limit pay).

However it seems to me that greater thought needs to be paid to the crux of the issue: the notion of ‘fair pay’ in today’s society. An evidence base achieved through detailed research and consultation into what fair pay means to a cross-section of society should inform guiding principles for decision making about pay and remuneration.

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