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Top pay is about power not merit or value

Yesterday’s interim report of the High Pay Commission provides some important information about top pay, but misses the main point. It says that the average annual salary of a FTSE chief executive in 2010 was £72,057 a week (£3.75 million a year), compared to the average wage (i.e. national median full-time wage) of £496 a week. Top pay is therefore 145 times higher than average pay. Compared to the minimum wage of £222 a week, top pay is 324 times higher. The question is: are gigantic differentials like this conceivably justified?

What has happened over the last century is that the share of national income taken by the top 0.1% of earners (just 30,000 persons) fell from an estimated 14.5% in 1900 to 1.2% in 1979, at which point the Thatcher regime steadily reversed this decline, a process still gathering pace today. Presently the top 0.1% take about 8% of national income, a share which on current trends if not countered could take this tiny clique at the top back towards the 14% of Victorian times by 2030.

Since there has thus been a 12-fold change during the last century in the relative share of national income going to top earners or chief executives, there is clearly no inherent logic in what they should be paid. No serious attempt has ever been made to justify the relative value of top pay in terms of merit or worth, using criteria that apply uniformly across the whole spectrum of employment. Instead it is decided in terms of power. From 1900 to 1979 the declining share of national income going to the top 0.1% reflects the rising power of the Labour Party and the trade unions, and the rising share of the ultra-rich since 1979 reflects Labour’s diminishing influence since then.

So what should be done? There are broadly 4 ways of restoring some measure of equity in the nation’s distribution of income. Top pay could be directly and transparently related by publicly agreed criteria (not by some cosy privately arranged remuneration committee) to company performance. Or shareholders could have a mandatory say in senior pay and bonus packages, though shareholders tend to be interested only in short-term gains, not in investment in long-term corporate market share. Or there could be a Royal Commission appointed, with a genuine cross-section of all key interests, to produce guidelines to evaluate relative merit uniformly across the national workforce – the inauguration of morality and equity over naked power. Or, since all the previous proposals omit a direct voice for the 99% of people who make up the overwhelming bulk of the workforce, an Enterprise Council, made up of representative of all the main grades of employees, could be set up in all medium-sized and large firms (say, those with over 200 employees) which would have a duty each year to open up the books, examine the company’s total debit and credit account, and in the light of this determine the incomes of each of the main grades for the next year.

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