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Inequality is booming – top pay needs a ceiling

The bossesThis is an abridged version of the speech Michael Meacher made to the House of Commons on Thursday calling on the Government to set guideline targets for remuneration which over time reduce the ratio between top and bottom incomes in large organisations to no more than 50 to 1.

The excesses of extreme inequality are increasingly seen as a serious, moral, economic and social problem, yet the issue has not received the attention that it clearly deserves.

It is worth saying at the outset that concern over this matter is not the preserve of the political left. In this past month, Mark Carney, Governor of the Bank of England, and Janet Yellen, the chair of the US Federal Reserve, have both argued that the enormous growth in inequality over the past few decades was not only wrong morally but was having increasingly baleful economic consequences.

Then there were the strictures of Christine Lagarde, the managing director of the International Monetary Fund, arguing that the current explosion of inequality was now acting as a brake on growth. They all say that inequality fosters fear, creates too much demand for credit to compensate for squeezed living standards, drives asset price bubbles, catalyses financial instability, and, by displacing too much risk on those who cannot bear it, undermines the legitimacy of capitalism.

The facts on ballooning inequality are broadly well understood. Official statistics show that average weekly pay in June this year was £477, while the average annual take-home remuneration among the FTSE 100 chief executives was £4.3 million, or £83,000 a week. The ratio between their remuneration and the remuneration of the average UK worker is therefore about 175:1. That needs to be put into perspective.

In 1998, according to the High Pay Centre, a FTSE 100 boss was typically paid 47 times more than their workers. In other words, in just 16 years, the gap between top incomes and the average wage has nearly quadrupled. The obvious question then is: is all this justified? In fact, there is rather little correlation between the surge in executive remuneration and company performance; sometimes, there is even a negative correlation. The director of the High Pay Centre, Deborah Hargreaves, explains the phenomenon. She says:

The only reason why their pay has increased so rapidly compared to their employees is that they are able to get away with it.”

They are able to get away with it largely because of the structural divide in the way in which pay is determined in this country. For manual workers, it is by collective bargaining. That has dramatically declined in the past 30 years, leading to a very sharp fall in the share of wages in GDP from 65% to about 53%. For white-collar workers, it is by private contracts, which are laid down by the employers. But for chief executives in the boardroom, it is by remuneration committees, specifically chosen by the board itself, which largely operate on the principle of “you scratch my back and I’ll scratch yours.” That is not a system that carries credibility across the whole spectrum of the work force.

One might even question why such elaborate devices are needed for top executives to secure a maximum uplift in pay, since one would have thought that £80,000 a week was far beyond what is necessary for the most comfortable lifestyle. Indeed, one could reduce a £2.5 million income by almost 95% and the recipient would still be in the top 1% of all earners in the UK. That is a staggering fact.

Are incomes 10 or 20 times more than the earnings of those already considered very, very rich strictly necessary? The only answer seems to be that these turbo-charged salaries have almost nothing to do with performance and everything to do with chief executive officers keeping up with each other in a status race. In other words, rather as in the end of the Victorian period, which we are getting closer to now, the very rich constantly demand yet more wealth to show it off in order to demonstrate where they stand in the pecking order.

Does that matter? The apologists for inequality have always traditionally argued that it does not because it does no harm to other people. Peter Mandelson notoriously argued that new Labour was:

intensely relaxed about people getting filthy rich”.

But he did add

as long as they pay their taxes.”

That was partly on the grounds that wealth would then trickle down to everyone else, but it has not trickled down; it has gushed up as if from a geyser. According to the Sunday Times rich list, the richest 1,000 persons in this country—just 0.003% of the adult population—have doubled their collective wealth in the six years since the crash, from a staggering £250 billion to more than £500 billion.

Moreover, that does harm other people. It leads to smouldering resentment, which can at times explode if triggered by a sudden event, such as the five days of rioting after Mark Duggan was shot in August 2011. It undermines trust and solidarity and it weakens the social fabric of communities. Above all, it has been shown unequivocally by Richard Wilkinson and Kate Pickett in The Spirit Level that across all countries—it is not just the UK—the greater the inequality, the greater the degree of social pathology in terms of homicide levels, crime and violence, mental illness, imprisonment, teenage pregnancies, obesity, maths and literary educational scores, life expectancy, infant mortality and many others.

It is not just the poor who suffer, although they certainly suffer the most; those impacts extend widely across the whole society. It is not just the social impacts of inequality that damage society, but the economic ones as well. It weakens aggregate demand, which is serious at times like the present when all the other potential sources of demand—Government expenditure, business investment and net exports—are negative.

Andy Haldane, the chief economist at the Bank of England, recently summed up the economic impacts of excessive inequality. He said that

there is rising evidence that extreme inequality harms, durably and significantly, the stability of the financial system and growth in the economy. It slows development of the human, social and physical capital necessary for raising living standards and improving wellbeing. That penny is starting to drop among policymakers and politicians.”

I hope that his last comment was right.

What should be done? My proposal is that the Government should set guidelines for remuneration that, over time, reduce the ratio between top and bottom incomes in large organisations to no more than 50:1. That would still allow top incomes to reach nearly £24,000 a week or £1.25 million a year. I think that that is justified on two grounds. First, in the period when capitalism flourished most in the UK—that is, the three decades after the war—the ratio was 40:1 or less. Secondly, the most successful dynamic economies with the highest long-term growth figures and the greatest social cohesion in the past 40 years—I am thinking of Japan up to the 1990s, the east Asian tiger economies, Sweden, Norway and Singapore, among others—all had a ratio of less than 50:1.

Of course, there are other ways of moving towards the same objective. The Business Secretary introduced new regulations that became operative this year, empowering shareholders with a binding veto over company executive pay policy. Despite his good intentions and the shareholder spring that peaked in 2012, that has not ever been called on, partly because the holdings and voting rights on pay are controlled by very wealthy fund managers and the work force have no say in the process at all. That suggests that the structure of incentives and pressures needs to be recalibrated.

I have already quoted Deborah Hargreaves’s remark that executive pay soars because they can get away with it. Corporate power and the greed and self-interest that go with it have increased dramatically over the past three decades and they are still increasing. That needs to be redressed. There are several measures that could help. One is the mandatory publication of company pay ratios, as is already operated by John Lewis where the ratio is 75:1, and TSB where it is 65:1. Another would be to strengthen the coverage of trade union collective bargaining, which has shrunk dramatically over the past 30 years from 82% to a wholly inadequate 23%.

A further measure would be to increase the prevalence of work-force-wide profit sharing. In my view, the most effective mechanism would be the introduction in all large companies of what I would call an enterprise council, made up of representatives of all the main grades of employees and meeting at least once a year to open up the books, look at all the company’s activities, consider how failures could be corrected and performance improved, think about the financial implications of depreciation, investment, stock control, dividends and so on and then examine the bids for pay increases across the company over the next year. That would strengthen the cohesion and solidarity of the company, greatly improve morale and productivity and almost certainly enhance profitability.

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