Only a maximum wage can end the great corporate pay robbery

Corporate wealth is being siphoned off by a kleptocratic class that has neither earned nor generated it

• 
• • George Monbiot
  • guardian.co.uk, Monday 23 January 2012 18.58 GMT
  • larger | smaller

The business secretary, Vince Cable. Photograph: Martin Argles for the Guardian

 

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, is a form of institutionalised theft, arranged by a kleptocratic class for the benefit of its members. The wealth that 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 10 years, chief executives' pay has risen nine times faster than that of the median earner. Some bosses (British Gas, Xstrata and Barclays for example) are now being paid over 1,000 times the national median wage. The share of national income captured by the top 0.1% rose from 1.3% in 1979 to 6.5% by 2007.

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. 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. 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, it's not just that there is currently no visible link between performance and pay; but high pay actually reduces performance. Material rewards incentivise simple mechanistic jobs: working on an assembly line, for example. 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, 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." Jeroen van der Veer, formerly the chief executive of Shell, recalls, "if I had been paid 50% more, I would not have done it better. If I had been paid 50% less, then I would not have done it worse". 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. 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. They create resentment and reduce the motivation of other workers, who see the greedy bosses as the personification of the company.

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. 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%. Why should oil sheikhs 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.

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. Its recommendations are, to be frank, pathetic. With the possible exception of employee representation on pay committees, the 12 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. 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. If Vince Cable intended to limit executive pay, he would limit it. But he knows who his masters are, and the policies he has announced are intended to create only a semblance of action.

Call the fat cats’ bluff and tax their preposterous pay fairly

September 2, 2007
Simon Jenkins

Prison officers last week went on strike over a pay rise of 2.5%, phased. The heads of Britain’s 100 biggest companies have had 37%, unphased, as presumably are its recipients. The bosses won 28% more last year, 16% the year before and 13% and 23% in the two preceding years, yielding an average pay of £2.8m a head or 20 times the rise in price inflation. Under Labour, these company directors have stretched their remuneration to almost 100 times average earnings, a gap unprecedented since the rise of modern taxation.

Is this a good or bad thing? Any pay package is, like beauty, in the eye of the beholder. But for an entire class of workers to receive sequential increases of 37%, 28% and 16% suggests a serious leakage of cash from businesses into the pockets of those at the top. Nor is there any noticeable relationship of pay to company size or success. Last week Eric Nicoli left as boss of EMI after eight years in which the company faltered and its share price fell by 40%. Yet he received £800,000 a year in salary and was given a leaving present of £2.8m.

Cash bonuses mostly in financial services are beyond the imaginings of wage slaves. Bob Diamond, who works at (but does not even run) the floundering Barclays Bank, took a bonus of £10.4m this year. Sir Fred Goodwin of the Royal Bank of Scotland took £2.7m. Last month’s Guardian/Office for National Statistics survey reported that bonuses overall increased 30% in 2007 to £14 billion, double last year’s rise. Readers may be tempted to ask how people contrive to dispose of such sensational winnings each year.

The apologists have been in full cry. A simple response is to play the comparisons game. These companies are the size of small states and their leaders have a right to tax their workers and shareholders accordingly. So implies Peter Newhouse, the survey’s author, and a consultant with Reward Technology Forum. He says we should publicise rewards as “an important message to able and aspirational young people”. The CBI adds that companies must pay “the going rate” or competitive talent will float offshore and something called UK plc will suffer. Britain now depends for a third of its income on financial services, so do not kill the geese that lay the golden eggs.

Nor is that all. As this money swills through the pockets of bonus recipients, say the apologists, it “trickles down”, finding an outlet not just in blue-chip properties but in cars, restaurants, holidays, nannies, clothes, hunting stables and Cotswold interiors, most with a high labour content. The incomes of the very rich allegedly redistribute to the poor faster through personal expenditure than through taxation. This is plausible given how much of the latter goes on white collar salaries, fees and subsidies.

But all this is special pleading. In allowing himself to be bluffed by the super-rich, that they will emigrate if he properly taxes their earnings, Gordon Brown falls for the Mandy Rice-Davies retort: they would say that, wouldn’t they. As for dangling £2m bonuses before the young, it is like Margaret Thatcher telling young women to find themselves rich husbands. Other proffered comparisons, such as between executives and Elton John and David Beckham, ignore the fact that such celebrities operate in a truly open market, do not determine their own incomes and, unlike City firms, receive no public money.

Anyone who has served on a corporate remuneration committee knows how it operates. It puts pay decisions out to consultants who, like the nonexecutives, the headhunters and senior management as a whole, have a vested interest in inflated incomes. Everyone scratches everyone’s back.

Discussion is not concerned with market forces but public relations. How will an outrageous bonus look to the press? Can shareholders and investors be fooled?

Apart from such rare company doctors as Stuart Rose of Marks & Spencer, who can add value out of proportion to their price, Britain is experiencing the same breakdown in top pay restraint that JK Galbraith noted in America. Corporate remuneration, he remarked, was nothing to do with the marketplace but was a heart-warming gift from executives and their friends to each other, a gift that had grown so large as to “verge on larceny”.

I suspect that wildly extravagant short-term “incentives” are as likely to distort performance as boost it, as is the case with Whitehall public service targets. As for the idea that a 37% pay rise will trickle down to help the poor, this might pass muster as an economics essay but it will get short shrift in the canteen where 2.5% is the norm. Why does trickle-down not apply to them?

The claim that executives with families well installed in London and country houses will suddenly vanish to Monaco or the Cayman Islands if not paid millions more each year (or if fully taxed on those millions) is absurd. It ignores the role of location, lifestyle and other nonpecuniary perks in a modern executive’s career package.

Being well regarded for running a successful company should be more satisfying than a reputation for greed, as BP’s Lord Browne and the privatisation “fat cats” of the 1980s found to their anguish. London’s financial preeminence is based primarily on its lax market regulation and its agreeable living conditions for those not reliant on public services. Businesses will leave Britain not when executives are properly taxed but when they start losing money.

I prefer to kick all this out of court. The rich, like the poor, are always with us. There is no morality in economics. The exponential rise in corporate pay is a hangover from the 1986 Big Bang phase of Thatcherite capitalism. If it had anything to do with free competition, there would have been a rush of talent into this market sector and a consequent fall in pay. That has not happened.

Two forces are influencing top people’s pay. The first is structural. The fortunes recently made in the City are largely due to a shift from lumbering corporate suppliers of financial services, such as banks and brokers, to fast-moving individuals and partnerships. I see no harm in this. More worrying is the new cartels, like those that the Big Bang supposedly smashed. Just four accountancy firms control large-scale audit and have spilt over into public/private finance. Half of management consultancy, again involving a small group of firms, relies on work from government. The rise in statutory regulation under Labour has sent legal and other professional bonuses soaring. As Adam Smith said, people of the same trade never meet “even in merriment” but to conspire to raise prices. This is government’s doing.

The other force is political. The widening of the pay gap, which has not occurred in continental Europe, followed the disempowering of organised labour by Margaret Thatcher and Tony Blair, vigorously supported by Brown at the Treasury. This has released corporate Britain from any sense of self-restraint. Indulging tax loopholes for the rich while ordering workers to shoulder the fight against inflation may help Brown sound macho in the City, but it is high-risk politics.

A real sense of unfairness greeted the revelation that a number of the richest participants in economic success were, de facto, being subsidised by the rest through private equity tax evasion and/or nondomicilary status. The same anger was unleashed by the disclosure that a shift in the economy from manufacturing to financial services had led to a shift in profits to offshore tax havens.

Any lobbyist can cobble together special pleading for such antics, but they will not wash for millions of hardworking, tax-paying Britons. Low taxes for all are good, but tax breaks for a privileged few are wrong. The rising tide of wealth should float every boat, not just executive yachts.

As most people see their incomes slide ever further behind those about whom they read in the papers, they will be more inclined to cry halt. Democracy may not be the force it was, but it can deliver politicians an occasional kick, as can industrial relations. The prison officers may yet prove a straw in a wind that sweeps up others in its tail.

The days of statutory pay restraint are mercifully past, replaced in Britain by the most fluid labour market in Europe. But government vigilance is needed to retain that fluidity, and a regard for fairness to back it up.

Capital and labour will never coexist in a climate of equality, but some respect for equity must underpin the nation’s social contract. Otherwise we shall be back to the bitter divisions of the 1970s, where nobody wants to go.