The successful bank robber no longer covers his face and leaps over the counter with a sawn-off shotgun. He arrives in a chauffeur-driven car, glides into the lift then saunters into an office at the top of the building. No one stops him. No one, even when the scale of the heist is revealed, issues a warrant for his arrest. The modern robber obtains prior approval from the institution he is fleecing.
The income of corporate executives, which the business secretary Vince Cable has just failed to address(1), is a form of institutionalised theft, arranged by a kleptocratic class for the benefit of its members. The wealth which was once spread more evenly among the staff of a company, or distributed as lower prices or higher taxes, is now siphoned off by people who have neither earned nor generated it.
Over the past ten years, chief executives’ pay has risen nine times faster than that of the median earner(2). Some bosses (British Gas, Xstrata and Barclays for example) are now being paid over 1000 times the national median wage(3). The share of national income captured by the top 0.1% rose from 1.3% in 1979 to 6.5% by 2007(4).
These rewards bear no relationship to risk. The bosses of big companies, though they call themselves risk-takers, are 13 times less likely to be sacked than the lowest paid workers(5). Even if they lose their jobs and never work again, they will have invested so much and secured such generous pensions and severance packages that they’ll live in luxury for the rest of their lives(6). The risks are carried by other people.
The problem of executive pay is characterised by Cable and many others as a gap between reward and performance. But it runs deeper than that, for three reasons.
As the writer Dan Pink has shown, high pay actually reduces performance(7). Material rewards incentivise simple mechanistic jobs, such as working on an assembly line. But they lead to the poorer execution of tasks which require problem solving and cognitive skills. As studies for the US Federal Reserve and other such bolsheviks show(8), cash incentives narrow people’s focus and restrict the range of their thinking. By contrast, intrinsic motivators — such as a sense of autonomy, of enhancing your skills and pursuing a higher purpose — tend to improve performance.
Even the 0.1% concede that money is not what drives them. Bernie Ecclestone says “I doubt if any successful business person works for money … money is a by-product of success. It’s not the main aim.”(9) Jeroen van der Veer, formerly the chief executive of Shell, recalls, “if I had been paid 50 per cent more, I would not have done it better. If I had been paid 50 per cent less, then I would not have done it worse”(10). High pay is both counterproductive and unnecessary.
The second reason is that, as the psychologist Daniel Kahneman has shown, performance in the financial sector is random, and the belief of traders and fund managers that they are using skill to beat the market is a cognitive illusion(11). A link between pay and results is a reward for blind luck.
Most importantly, the wider consequences of grotesque inequality bear no relationship to entitlement. Obscene rewards for success are as socially corrosive as obscene rewards for failure. They reduce social mobility, enhance plutocratic power and allow the elite to inflict astonishing levels of damage on the environment(12). They create resentment and reduce the motivation of other workers, who see the greedy bosses as the personification of the company(13).
Vince Cable has announced four main policies: more transparency, a requirement that companies should “report” on boardroom diversity, a mechanism for clawing back pay settlements not justified by the company’s performance, and granting shareholders binding powers to block excessive rewards. They are likely to be almost useless – or worse. Pay transparency, while of general interest, can create the perverse result that executives discover how much their rivals are getting, and use the information to demand more. The clawback mechanism will be inserted into the corporate governance code(14). This is voluntary, and its existing provisions are widely ignored.
Shareholder power is likely to be illusory. As Prem Sikka has shown, the proportion of stock owned by individuals fell from 47% in 1969 to 10% in 2008, while the percentage in foreign hands has risen from 7% to 42%(15). Why should oil shiekhs care about social justice in the UK? And most traders hold shares too briefly to take an interest in the inner workings of a company. As Rob Taylor, formerly the chief executive of Kleinwort Benson, points out, if shareholders don’t like the way a company is run, they don’t hang around to change it; they sell up and move on(16).
Labour’s policies seem designed to sound tough but change little. Like Cable, its spokesman Chuka Umunna talks of transparency and simplicity (which are both worthy aims) but not of holding down pay. Labour has based its policy on the findings of the High Pay Commission, which have been widely hailed as revolutionary. I’ve read the commission’s final report, and can find no justification for this description(17). Its recommendations are, to be frank, pathetic. With the possible exception of employee representation on pay committees, the twelve measures it proposes are likely to make only a marginal difference. Nowhere does it suggest anything resembling the obvious means of capping executive pay: namely, er, capping executive pay.
So what should be done? The UK government imposes a minimum wage, and even the neoliberal coalition appears to accept that this is a necessary intervention in the market. So why should it not impose a maximum wage?
I’m not talking about ratios or relative earnings. Various bodies have proposed that there should be a fixed ratio of the top earnings within a company to either the median or lowest salaries. But as a report on this issue by the New Economics Foundation shows, the first measurement quickly becomes complex and opaque, the second creates an incentive to contract out the lowest paid work(18). I’m talking about an absolute maximum, applied nationwide.
Let’s say £500,000 a year, a figure that includes bonuses, share options, pensions and benefits. It will rise with inflation, but no faster than that. If you want to make more, you can invest in a risky venture of your own or someone else’s. If you want to make more money as a salaried worker – in other words while other people carry the risks – you can go abroad, and good riddance to you. Another country, incautious enough to set no cap, can deal with the consequences of your destructive greed.
The feeble measures proposed by the government will do nothing to prevent the great pay robbery. Vince Cable knows who his masters are, and the policies he has announced are intended to create only a semblance of action.
2. Stewart Lansley, 2010. Unfair to Middling: How Middle Income Britain’s shrinking wages fuelled the crash and threaten recovery. Trades Union Congress. http://www.tuc.org.uk/extras/unfairtomiddling.pdf
3. New Economics Foundation, 2011. The Ratio: common sense controls for executive pay and revitalising UK business. http://neweconomics.org/sites/neweconomics.org/files/The_Ratio.pdf
4. The High Pay Commission, 2011. Cheques With Balances: why tackling high pay is in the national interest. Final report. http://highpaycommission.co.uk/wp-content/uploads/2011/11/HPC_final_report_WEB.pdf
5. Stewart Lansley, as above.
6. See High Pay Commission, 2011. Just deserts, or good luck? High Earners’ attitudes to pay. http://highpaycommission.co.uk/wp-content/uploads/2011/11/HPC-Just.Desertspdf.pdf
8. Dan Ariely, Uri Gneezy, George Loewenstein, and Nina Mazar, 2005. Large Stakes and Big Mistakes. Woking paper number 05?11. Federal Reserve Bank of Boston. http://www.bos.frb.org/economic/wp/wp2005/wp0511.pdf
10. Quoted by the New Economics Foundation, 2009. A Bit Rich: Calculating the real value to society of different professions. http://neweconomics.org/sites/neweconomics.org/files/A_Bit_Rich.pdf
13. See the discussion on pages 26-28 of the High Pay Commission’s final report: http://highpaycommission.co.uk/wp-content/uploads/2011/11/HPC_final_report_WEB.pdf
17. The High Pay Commission, 2011. Cheques With Balances: why tackling high pay is in the national interest. Final report. http://highpaycommission.co.uk/wp-content/uploads/2011/11/HPC_final_report_WEB.pdf
18. New Economics Foundation, 2011, as above.