Final Report of the High Pay Commission Published:
Today the High Pay Commission publishes its final report, Cheques with Balances: Why tackling high pay is in the national interest, shows stratospheric pay increases which have seen wealth flow upwards to the top 0.1% away from average workers. It sets out a 12-point plan based on transparency, accountability and fairness to halt spiralling high pay that is creating inequalities last seen in the Victorian era.
The High Pay Commission’s reforms include:
- A radical simplification of executive pay
- Putting employees on remuneration committees
- Publishing the top ten executive pay packages outside the boardroom
- Forcing companies to publish a pay ratio between the highest paid executive and the company median
- Companies to reveal total pay figure earned by the executive
- Establishing a new national body to monitor high pay.
Cheques with Balances reveals how:
- Decisions to award huge pay packages are set by a “closed shop”, shrouded in highly complex detail, effectively hidden from shareholders, staff and the public.
- Stratospheric increases in pay are damaging the UK economy – distorting markets, draining talent from key sectors and rewarding failure.
- There appears to be little truth in the myth that pay must escalate to halt a talent drain in executives according to in-depth study by the High Pay Commission.
- The growing pay gap between the top 0.1% and everyone else is increasing public disillusionment, damaging trust and fuelling the view that business leaders are “in it for themselves”.
High Pay Commission chair, Deborah Hargreaves, said:
“There’s a crisis at the top of British business and it is deeply corrosive to our economy. When pay for senior executives is set behind closed doors, does not reflect company success and is fuelling massive inequality it represents a deep malaise at the very top of our society.
“The British people believe in fairness and, at a time of unparalleled austerity, one tiny section of society – the top 0.1% -continues to enjoy huge annual increases in pay awards. Everyone, including each of the main political parties, recognises there is a need to tackle top pay. That’s why we are saying there must be an end to the “closed shop” that sets top pay and that pay packages should be clear, open and published to shareholders and the public.”
November 22nd, 2011 at 10:16 am
[...] report titled “Cheques with Balances: Why tackling high pay is in the national interest” says that ”During the last 30 years rewards have been flooding upwards, with far more modest [...]
November 22nd, 2011 at 2:23 pm
Companies have limited liability – this means that when things are wrong their senior employees are not liable.
This is a priviledge that is being abused as many companies seem to be run for the benefit of their senior employees rather than anyone else
I think the reports recommendations are sensible. I have a couple of further suggestions.
1. All pay over a maximum salary – say £250k (10 times the median UK salary and £100k more than the PMs salary – used as a benchmark in the public sector) should not be deductible for corporation tax purposes.
This would mean that companies would have to clearly demonstrate to shareholders that these high earners were worth their keep and investors would want to know why anyone was earning over the tax deductible amount. It would also increase tax paid by companies with very highly paid staff. It would not however affect entrepreneurs who set up their own businesses
2. All staff joining a pension fund would have the opportunity to sign up for a pension which only invests in companies with fair pay for all staff (e.g. will not invest in companies that pay top staff over £1m or 20 times average wage.) If no companies sign up for this the fund will invest in government bonds or inflation linked gilts.
PS Government bonds have significantly outperformed the FTSE 100 for the last 10 years.
November 22nd, 2011 at 2:43 pm
I can’t work it out. The High Pay Commission seems to have no concept of private property. In a private company, the only people with an interest in pay are the owners. It’s nobody else’s business.
November 22nd, 2011 at 3:56 pm
[...] Deborah Hargreaves, chair, UK High Pay Commission, November 22, 2011, upon the release of the executive pay panel’s final report Print This [...]
November 22nd, 2011 at 11:07 pm
The problem is that the remuneration committees are populated by highly paid executives from other public limited companies. It’s in their interest to keep executive pay high in that company as they can then cite the pay in that company to claim a pay rise in their own company. In additiion, these remuneration committees are incestuous; senior executives sit on eachother’s remuneration committees (perhaps 1 or 2 companies removed which helps them claim no connection) and this undoubtedly results in a ‘you scratch my back and I’ll scatch yours’ culture.
It is not realistic to expect shareholders to restrict corporate pay either. The large pension funds, etc, mainly financial and public limited companies, are the ones who who hold the majority block shares. These companies, themselves, have excessively paid executives which means that they are unlikely to vote for pay restraint because this could affect their own pay.
I don’t think having employees on the Remuneraton Committee would make any diffference either as they would feel it necessary to vote with their bosses as the wrong vote could cost them their job in the future.
The only hope, other than regulation, could be the small shareholders. There are a lot of small shareholders who vote against pay rises but these are always drowned out by the big block votes. To give more power to small shareholders the law should require that corporate shareholders cannot vote on remuneration matters and only individual shreholders can vote. With some thought on how this could be implemented, this could give the opportunity for reason to be realised in the matter of executive pay.
November 23rd, 2011 at 6:46 am
It is indeed up to the individual company owners to determine what pay they give allow their senior executives to receive. That’s the way the system has been designed.
Looking from a broader perspective though, one can wonder how solid and fair (!) the system is. With regards to the latter, I am all for rethinking and hopefully redefining the system, as continuing the current path will lead to an unsustainable situation where indeed the earth will be thrown back into the ages when only a few (maybe we need to state ‘even less than today’) determine what will happen to our (!) world.
In the end the question should be; who owns this planet, and why?
November 23rd, 2011 at 2:28 pm
[...] statistics and many more come from the High Pay Commission’s final report [PDF], and together they paint a very stark image. Divorced from measures of corporate performance, [...]
November 25th, 2011 at 3:20 pm
[...] Stratospheric increases in pay are damaging the UK economy by distorting markets, draining talent from key sectors and rewarding failure, according to the final report by the High Pay Commission. [...]
November 25th, 2011 at 3:23 pm
[...] Stratospheric increases in pay are damaging the UK economy by distorting markets, draining talent from key sectors and rewarding failure, according to the final report by the High Pay Commission. [...]
November 28th, 2011 at 1:57 am
[...] comes courtesy of the High Pay Commission, an independent blue-ribbon UK panel that last week delivered its final [...]
November 28th, 2011 at 2:13 pm
[...] “yearlong inquiry into pay at the top of UK companies.” The report came with a set of recommendations, which would have implications for the types of data available on executives with these [...]
November 28th, 2011 at 5:24 pm
The problem is real, but the solutions are political not practical.
People in charge of their own pay will always push it as far as possible until there are negative consequences. The nub of the issue here is that there are no negative consequences.
It is the role of the shareholders to limit expenditures like this so as to limit their own risk. Because the system is currently set up to shield shareholders from risk they have not been performing this function.
Re-exposing the shareholders to risk, and making sure that they are given the facts they need will rebalance the system.
November 30th, 2011 at 9:08 am
[...] and is fueling massive inequality, it represents a deep malaise at the very top of our society. http://highpaycommission.co.uk/uncategorized/final-report-of-the-high-pay-commission-published/ Deborah Hargreaves, chair, UK High Pay Commission, November 22, 2011, upon the release of the [...]
December 2nd, 2011 at 5:23 pm
[...] cultural and ethnic backgrounds are less socially embedded than a homogenous group – a “closed shop” as it was described in the UK last week – and are more apt to challenge, monitor and control [...]
December 5th, 2011 at 10:11 pm
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December 9th, 2011 at 8:51 am
[...] follows on from the independent High Pay Commission’s report into executive remuneration, which emphasised the need for shareholders to play an activist role in [...]
December 10th, 2011 at 9:16 pm
Unfortunately, the commission’s recommendations are merely a set of bland exhortations relating to transparency, accountability and fairness. Even if implemented, which is unlikely, they will only provide more information about what top executives earn and how their pay relates to other employees. They will have no direct effect on executive pay. The only way to reduce the ever-increasing, unmerited executive pay packets is through government-imposed action to restrain pay levels.
A remarkable aspect of the commission’s report is that all it’s “then and now” comparisons are made against 1979-80 but the commission does not make the obvious connection between the rise of executive pay over the last 30 years and the removal of the top rates of tax (75%-85%) in 1979. The removal of the remaining higher rates of tax (45%-60%) in 1988 led to a further ratcheting up of executive pay in the 1990s. Punitively high rates of taxation on high pay impose an effective salary cap because the cost to the employer is excessive compared to the net benefit to the employee. The only way to restrain executive pay is to re-instate high rates of tax on high incomes. Here is my proposal, which is much less punitive than the tax structure prevalent in the 1970s:
£150K-£600K 50%
£600K-£2.5m 60%
£2.5m-£10m 70%
£10m-£40m 80%
>£40m 90%
No doubt the highly paid executives would complain about the loss of incentives but the commission’s report contains extensive quotations about the non-financial rewards that keep executives in their posts. If you give executives free reign to take as much money as they like from their companies’ coffers, they will take it.
One advantage of punitive tax rates over arbitrary pay caps is that the government benefits, in the form of increased income tax receipts, from executives who decide to pocket shareholders’ returns for themselves. This, in turn, benefits the rest of us.
There is also a strong economic argument for restraint on executive pay. The efficiency of a free market and its moral justification rely on all participants in the market being “price takers”. That is, no individual or group of individuals is rich or powerful enough to have a direct influence on market prices. This is clearly not the case with top executives, who are increasingly acting as an oligopoly to increase their own pay at the expense of everyone else. Direct restraints on the pay and power of executives are therefore necessary to maintain a free, open and efficient market. Similar restraints are also required on large corporations, for the same reason.
December 27th, 2011 at 4:58 pm
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January 9th, 2012 at 2:21 pm
[...] UK that something needs to be done to end the huge pay rises of senior executives. According to the High Pay Commission, directors of FTSE 100 companies saw their remuneration packages rise by 49% in 2010. Average [...]
January 17th, 2012 at 2:47 am
[...] High Pay Commission recommendations, including employees on salary [...]
January 24th, 2012 at 10:50 am
[...] directors. The pressure was maintained when the High Pay Commission released its widely respected report in [...]
January 24th, 2012 at 12:46 pm
[...] says Umunna, will implement the findings of the High Pay Commission and the Walker Review. Things like: "Why has the Prime Minister and his Conservative colleagues in [...]
March 2nd, 2012 at 3:47 pm
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March 6th, 2012 at 4:04 pm
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April 5th, 2012 at 5:46 pm
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April 8th, 2012 at 4:23 pm
The issues are much deeper than we are lead to believe. It is a matter of balance, yin and Yang of economics. I have a deep support for this issue and have started a Facebook page to try to build support to fight this malaise,
Why are CEO’s allowed to accept pay awards greater than the growth in the company profits? Why are employees squeezed for greater performance for diminishing rewards?
I understand balancing the books, but surely the issue is that we measure success through financial rewards and the ego’s of CEO’s propagate a competition for rewards, citing “to attract the best we must pay the best”.
Why doesn’t this philosophy permeate the business? Wouldn’t it seem logical that those closest to the delivery of the product or service need to be the best too?
We all contribute to the success of our organisations, the whole structure inter-dependant on each other. Why therefore shouldn’t the solution be to fulfil them myth that “if we work hard we will share in the success of the company”.
If we regulate incomes so that all raises are tied to corporate performance then there would be capital in the economy to regenerate our failing economies, CEO’s would have a direct incentive to perform individually and a clear incentive to invest in employees to achieve excellence.
I guess there will be many responses to this, but ultimately the Ego’s and self interest of those that we trust with our future will prohibit this as a sensible option!
As a final note to add to the mix, many of these CEO’s, I suspect, are hereditary rather than self made. The gambling instinct of the true entree-preneur maybe should be treated a little differently and there is a strong argument for risk and reward. But surely this reward is only pertinent to the foundation and establishment of the company and thereafter excessive rewards are just greed.
Perhaps we are entering a time where our value system needs re-defining, maybe the we should value those who give the best standard of living to ALL their employees and stakeholders.. and hence give a real contribution to society.
After all if this were the philosophy, then perhaps we would have a more ethical business platform?