A Fairer Share of the Wealth

Luke Hildyard, Director of the High Pay Centre, says adoption of stakeholder-orientated cultures would improve decision-making as well as reducing wage disparities.

More than eight out of ten adults in the UK reported an increase in the cost of living in March, just as the Office for Budget Responsibility warned that real incomes will start falling and not recover for another two years.

A report from the House of Commons into the rising cost of living states that rocketing food prices and energy costs will push inflation to 8.7% in the final quarter of this year. On top of this, taxes rises introduced this month added to the significant strain on household budgets.

But not every household.

PwC’s analysis of salaries paid to FTSE 100 CEOs, published in April, shows an average increase of 34% from £3.1 million in 2020 to £4.1 million, marking a return to pre-Covid-19 levels.

Thanks largely to a return to bumper bonus pay-outs that were cancelled by some companies during the pandemic, board directors – many of whom are already recipients of the largest salaries in the country – enjoyed a lucrative 12 months.

The notably different recent experiences of the top brass and the employees who work for them will, according to Luke Hildyard, Director at think-tank the High Pay Centre, serve to heighten the already cavernous pay gap between CEOs and their employees.

In 2020 the High Pay Centre reported that the median FTSE 100 CEO was paid £2.69 million: 86 times the median full-time worker in the UK.

The think-tank’s latest research reveals the median FTSE 100 CEO’s earnings for 2022 surpassed the median annual wage for a full-time worker in the UK by around 9am on Friday 7 January. In other words, a CEO would need to work for just four days to achieve the annual salary of a typical employee.

Hildyard says: “If you look at CEO pay levels relative to wider society, they’re still incredibly high. And this isn’t just listed companies; CEOs, lawyers, bankers, and those that make up the top 1% [of earners] in the UK do very well while wages are stagnating over the long term for low and middle earners.”

He continues: “At a time when it is a struggle to generate economic growth in the UK, how wealth and incomes are distributed becomes more important. There is a convincing argument that if big employers in the UK distributed [earnings] evenly, that would be a way of raising living standards for low and middle earners.”

Missed opportunity

But convincing company boards to cut their own wages in favour of redistributing wealth is a challenge.

High Pay Centre research in conjunction with the Open University, the University of Nottingham and Canada’s Western University, found fewer than half of Britain’s leading businesses cut executive pay in response to the economic shock of Covid-19.

In a survey of 216 non-financial companies with a market value of over £500 million, just 104 firms took at least one measure to cut executive pay.

This, according to Hildyard, was a missed opportunity.

“It is a bit of a shame. You have politicians standing up in Parliament highlighting the efforts of people on the frontline who we relied on through this crisis. Delivery drivers, supermarket workers, refuse collectors; these are all people on quite low pay still having to work at heightened risk of virus infection versus other white-collar workers whose jobs perhaps aren’t as crucial to our day-to-day life. There was a moment where people were thinking we have an unequal society and maybe we could achieve a slightly better balance, but some of that momentum has been lost.”

He adds that while not all companies were ‘tone deaf’ in their response to tackling pay discrepancies post-Covid, greater pressure from regulators is needed to ensure boards temper executive pay.

“If you look at some of the company annual reports in the aftermath of the pandemic, they’re not completely tone deaf. They’re very keen to talk up their efforts to support lower paid workers and the sacrifices that higher paid workers made. But if there is more social pressure and the threat of regulation, companies might behave a little more responsibly.”

He would like to see company law changed to limit shareholder primacy in favour of other stakeholders which would mean less dividend payments and a greater distribution of wealth back to employees.

“Changing company law to not elevate shareholders above all other stakeholder interests would be symbolically quite important and lead to significant cultural change,” Hildyard says.

Hildyard’s view reflects that of the Better Business campaign which is calling for an amendment to Section 172 of the Companies Act, which would require directors to “exercise their judgement in weighing up and advancing the interests of all stakeholders”.

Investor influence

Hildyard notes that institutional investors are taking a greater interest in director remuneration.

The Investment Association predicts that executive pay and pensions will “continue to be a priority for investment managers [this AGM season]. Investment managers will expect to see a plan to align pension contributions for directors with the contribution levels of the wider workforce by the end of 2022, as part of wider efforts to ensure fairness and good employee relations.”

There has been an increase in recommendations from investor advisory firms that shareholders vote down executive remuneration proposals.

This April, Glass Lewis advised investors to reject Goldman Sachs CEO David Solomon’s US$35 million pay package; a deal that would make him the world’s best-paid banking boss alongside Morgan Stanley’s James Gormon. The AGM takes place this May.

Hildyard would also like to see more investor pressure to ensure worker representation on boards which he says is an important tool in ensuring fair pay across a workforce and moving from a shareholder-orientated culture to a stakeholder one.

Last year several US companies – including Disney, Citigroup and Starbucks – received investor requests to put proposals to a vote at their AGMs on the topic of employee board representation. And while none successfully passed, Hildyard believes this type of attention encourages corporates to at least entertain the idea.

“Even if [shareholder resolutions] are not successful, they are a useful tool for focusing the management attention on the issues that are important to investors. Resolutions focusing on worker representation could become more commonplace in the UK.”

Vehement opposition

Broader representation at high levels within large corporates can improve boards’ alertness to prevailing society views on issues beyond pay. Hildyard says that additional investor pressure for companies to move from shareholder to stakeholder-orientated cultures might have meant less “vehement opposition” from Shell and BP to proposals for a windfall tax, following the huge increase in their profits generated by the fuel crisis.

Hildyard says that both companies argued that paying additional taxes would damage their potential to invest in clean energy initiatives, while noting they paid nearly £150 billion in dividends and buybacks over the past decade.

This is, Hildyard says “a good example of how a stakeholder-orientated culture hasn’t taken hold” yet and argues that CEOs need to be more willing to reflect the experiences of their employees’, customers and wider society by limiting excessive pay and redistributing the company’s wealth.

This year the High Pay Centre will focus on gathering more data on the pay structures across organisations including those indirectly employed, such as agency staff, who are often on the lowest wages.

Hildyard also wants to provide more information on how senior managers are remunerated since these may not be included in company reports but may contribute to pay disparity. For example, he notes that top-level employees not listed in annual accounts could be earning significant sums that unfairly outweigh the salaries of those further down the company. Greater transparency across the board, Hildyard says, can ultimately mean improved pay parity.

However, he accepts that extracting information on pay is always a challenge and says he expects the rate of change on executive remuneration to continue at an incremental pace.


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