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February 10, 2012 / politicsbitesize

Executive pay – unfair inequality or fair competition?

We have all heard of the egg and spoon race held at a local school where everyone competing wins. Even though one child was clearly better than the others and one, sad to say, clearly worse, each child comes away sporting a medal/ribbon for their achievement. But what have each of them actually achieved? Does simply ‘taking part’ count now as an achievement? Are children told, ‘Well done Billy, you took part and that makes you a winner’, because if so what are we teaching these children? They learn that taking part is enough, it will get you where you want to be and there is no point really trying because everyone is a winner!

This sets the young adults of tomorrow up for a fall because, as we all know, the real world isn’t like that. But is it in danger of becoming like the local school sports day? Bankers bonuses and high executive pay are being debated and scrutinised more rigorously as the next round of bonuses are about to be unveiled. Sir Fred Goodwin – sorry, plain old Mr Goodwin now – was stripped of his knighthood recently because it was decided that he no longer deserved it for services to banking; he still retains his £700,000 a year pension though! Stephen Hester, the current chief executive of RBS, waived his bonus of nearly £1m due to political pressure. It seems then, that the government are listening, but as a society we need to clarify what it is we want them to hear and, therefore, what we want them to change.

Do we want income inequality reduced or do we want people to still try to be the best and compete to get better (paid) jobs? When interviewed on Radio 4’s Today programme Stephen Hester was asked why his £1.2m a year salary wasn’t enough. He replied: ‘I have great sympathy and, I hope, understanding with people focussing on income differentials and the issues of high earning – although that is far from restricted to me.’ James Naughtie continued with this line of questioning by asking him:

… the problem that a lot of people have vented their anger about is that they thought that a basic salary of £1.2m – and I accept that there are people in other banks earning much, much more than that – was something that puzzled them. It now irritates them at a time of austerity when they are being asked to trim their sales and accept freezes, or some times pay cuts, they ask, why is that not enough?

Stephen Hester’s reply was candid and open. He stated:

I think that the societal issues of what people earn in different walks of life is something that I am not going to be able to solve, it is a political debate and I am a business person … when I was asked to take on this job three years ago I had to replace the whole senior management team of RBS. We had to go around the world looking for the best people not just to run a bank well, but to diffuse the biggest time bomb in history in terms of bank balance sheets. Those people are doing a good job – I think they deserve recognition if they do a good job. It is our task to make sure there is a connection between the job that people are doing and, of course, how they get treated.’

It seems like a fair statement to make: if you work hard you get rewarded. And most fair-minded people would agree that if you are working in a highly stressful job that requires specific skills and involves working all hours then you should be compensated with an income in line with that work. But in today’s economic climate people are resentful that those in the sector that caused the economic collapse should be getting paid obscene amounts of money and not being penalised like the rest of us. So what can be done? The TUC have suggested that worker representation on remuneration committees would be more effective than a shareholder’s veto.

The TUC argues that the difference between the lowest and highest paid in a company would be more likely to diminish if workers were allowed to sit on committees that determine what a company executive should receive. A recent study has shown that in around 600 large European companies, the presence of worker representatives on committees correlates to lower executive pay. In fact, the appearance of these representatives could mean an improvement in the productivity and performance of any given company Will Hutton’s report, Review of Fair Pay in the Public Sector, commissioned by the government in 2010 cites academic evidence that shows high wage disparities can actually diminish a company’s output and performance*.

Although Will Hutton’s report focuses on the public sector he does suggest that the issues raised can be applied to the private sector too. In an interview with Matthew Taylor back in 2010, he discusses the recommendations given in his report. Hutton agrees there should be remuneration committees and thinks, ‘that not only should there be independent non-exec directors on them, but a representative of the workforce who knows necessarily what’s going on in the organisation.’ But he also suggests that an arbitrary ban on paying people very well for the job they are doing, if they are performing well, would be detrimental to a company and to society as a whole. A further recommendation by Mr Hutton is that an accountability mechanism is employed, wherein pay structures are explained to all within a company (and the public, if it is a public sector organisation) and justified.

Once again, fair-minded people see no problem in paying executives for their hard work and skills, but what they do ask is that that pay is fair and justified. As can be seen in the egg and spoon race example above, it is glaringly obvious that those who have come first in the race should be rewarded accordingly. However, if that first place has been gained through cheating then an appropriate punishment should be applied. The bankers haven’t been punished for their behaviour and, as James Naughtie pointed out, people are angry with this and want something done. What we must avoid as a society, however, is the desire to punish those with the responsibility of an executive job by stifling competitive pay packets. Large pay packets are only unequal and unfair if the money isn’t deserved or justified, so if companies can find their way to implementing an accountability mechanism and installing worker representatives on their committees then maybe balance can be restored.

*For example, a study by the Centre for Globalisation Research of 4,735 companies between 1991 and 2000 found that within-firm pay inequality is significantly associated with lower firm performance.’ – from TUC Site

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