Attempts to tackle the ‘problem’ of high pay will end up making everything worse

 
Len Shackleton
Daily UK Life 2019
Ever since the 1995 Greenbury Report, governance codes have been rejigged repeatedly to boost shareholder influence (Source: Getty)

The more we learn about what other people earn, the more concern there is about it.


Specifically, a political debate is raging over dramatic increases in the pay of chief executives of listed companies.

Deemed “unfair” in the widening inequality discussion, pressure is growing from activists and politicians to fix this so-called problem.

The latest call, supported in the Business, Energy and Industrial Strategy Committee’s report last month, is to require the publication of ratios comparing chief executives’ pay with that of lower-paid staff, and to “name and shame” high-payers.

This is unlikely to achieve much, except possibly encouraging businesses to delist (unlisted, they can pay bosses £265m without any scrutiny, as Bet365 did last year), or to manipulate ratios by outsourcing low-paid workers so they no longer show on their books.


This isn’t the first instance of a well-meaning idea that is in reality utterly ineffectual. Ever since the 1995 Greenbury Report, governance codes have been rejigged repeatedly to boost shareholder influence in pay-setting, to little avail – possibly because most FTSE-100 shareholders are now overseas investors, less concerned about top pay than Brits).

The limitations of corporate governance reforms have led to proposals for tougher action, such as putting workers on boards. Theresa May used to publicly support this, but she has since backed down. Jeremy Corbyn has no such qualms: he has outlined plans for all companies (public or private) with more than 250 employees to have a third of board members elected by staff.

Again, this has unintended consequences. Worker representation on German boards has not prevented companies from paying bosses generously. It may, however, have produced collateral damage, as employee representation has slowed restructuring and innovation.

With left-wing activists likely influencing the selection of reps in Britain, worse might be expected.

Labour also seeks to fix a maximum pay ratio of 20 to one between the highest and lowest paid workers in the utilities companies it wants to renationalise, and possibly in firms doing business with the government. To maintain relativities, middle managers and specialists such as engineers and accountants would also probably have to suffer pay reductions – far from ideal.

These ideas are already impacting pay in the public sector – and causing problems. For example, the Office for National Statistics is having difficulties recruiting a new boss, as the government is reluctant to increase annual pay beyond its current level. There may be similar problems recruiting a new Bank of England governor – pay has not increased since 2013.

Similarly, we now see universities having to go cap-in-hand to the Office for Students if they want to pay vice-chancellors more than £150k a year – a fraction of what equivalents earn in the US or Australia.

Government attempts to fix the price of market transactions have again and again proved damaging. In most such interventions – rent controls for example – there may at least be some short-term beneficiaries. Controls on top pay have no such discernible benefits, but can have damaging effects.

We should reject them, and reject the argument that says we need them in the first place.

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