marylsommers: Vince Cable should look past executive pay to the wages of the workforce

Monday, January 23, 2012

Vince Cable should look past executive pay to the wages of the workforce | Duncan Exley

As well as rewarding executives for poor performance, unfair pay has adverse impacts on the wider economy and on taxpayers

Vince Cable's policy announcement on tackling the soaring levels of executive pay is unlikely to put an end to the controversy. The business secretary's proposals place a lot of faith in the ability and willingness of investors to rein in excess. There will be no shortage of commentators pointing out that investors, some of whom are very well paid themselves, have neither the motivation, nor the form, to justify such faith.

So, it might appear odd to suggest that to reduce excessive income inequality and improve company performance we should be paying less attention to executive pay.

Although it is true that top pay has risen out of all proportion to either company performance or employees' pay, it is also true that focusing on the few people in the boardroom has led to us neglecting the fact that organisations also have other employees, whose pay and performance might also be important.

The way that executive pay is spoken about strongly suggests that the majority of the workforce are not really being considered. Many policymakers have expressed a desire to link executive pay to company performance, but suggest that company performance is entirely dependent on the actions of a handful of superhumans and that everyone else is more or less irrelevant. It is also telling that the government-commissioned Hutton review of fair pay in the public sector was actually a review of top pay in the public sector.

This compulsive focus on boardroom pay should concern those with an interest in the UK's unusually high levels of income inequality, because although top incomes have rocketed away from median incomes, there has been much less outrage about the stagnation of pay for the majority of the working population.

Paying insufficient attention to the wider workforce is likely to neither improve most people's living standards nor improve company performance. Despite the obsession with linking executive pay to performance, studies suggest that incentives tend to be counterproductive for directors, but effective for unskilled staff. Other studies show that productivity tends to be lower in organisations where pay gaps are wider, and that ? unsurprisingly ? people who think their pay is unfairly low tend to have reduced motivation.

However, unfair pay in the wider workforce also has adverse impacts on the wider economy and on all taxpayers. This is not only because of the obvious effect of low pay on suppressing spending, but also because levels of debt tend to be higher where pay gaps are wider. At the bottom end of the pay scale, there is a direct cost to taxpayers. The Institute for Fiscal Studies (IFS) estimates that pay below the living wage costs taxpayers �6bn a year in benefits and forgone revenue. The real cost is likely to be much higher, if we consider that 57% of children in poverty have at least one working parent and that child poverty costs us �25bn a year, to say nothing of the wider social costs of poverty and inequality.

Not only does excessive pay at the top lead us to neglect other employees' pay, but also directors' incentives may lead to suppressed pay further down. If directors' incentives are linked to company profits, then it may be tempting to increase profits by suppressing costs ? such as wages ? rather than the harder task of increasing revenues.

The egalitarian, financial and performance arguments for giving proper regard to the pay, performance and productivity of staff beyond the boardroom are strong ones. However, those who have most influence over organisations' pay ? in the company, the City, Westminster and Whitehall ? tend to interact with directors disproportionately (relative to their interactions with other employees) and therefore tend to think about directors disproportionately. This suggests that we need to have structural solutions designed to build a whole-company perspective into how companies operate and what they report on. This is why it is sensible to require companies to include employees on remuneration committees and to report on pay ratios and any policy on low pay. Unfortunately, Cable seems to have been persuaded away from rigorous action in those areas.

For all of our sakes, we need to remember that there are more people in a company than there are in a boardroom.

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Duncan Exley