Linking CEO pay to rates of lowest paid staff?
Some time back, I attended a workshop on inequality. One of the questions that intrigued me was, 'What should be the ratio of the CEO's pay in a company and the lowest paid workers?' (Sometimes this is put as a relationship to 'average pay in a company' or the relationship to 'the living wage'). One could argue as to why a meaningful ratio should exist at all but no-one gathered brought that up. The audience was asked for a show of hands for various options on the ratio of CEO pay to the lowest paid workers, starting off at 100 times and decreasing by 10 and then lower gaps once we got to 30 times.
Which multiplier would you choose?
It was a long time until hands were raised. Most hands went up between 10 and 20 times with the most going up at 12 times ie if the lowest paid worker was on £15,000 pa, then the CEO pay should be around £180,000. Apparently this window of 10-20 is consistent with audiences across the events that have been run - not only in the UK but across Europe.
Of course, there are no regulations and, if there were, they would need to vary per company, as some companies would have a large number of low paid workers e.g. supermarkets (and therefore low average pay), whilst others would not. In any case, companies do not use this thinking. They more than likely look at the market and at what other CEOs are paid - which is somewhat self-perpetuating. It may shock you to know that the CEOs of the FTSE 100 companies In the UK took home in 2014 on average £4.7m each or 120 times the average pay rate of their workforce.
What seems to be missing from the considerations of compensation sub-committees of boards is the ethical and moral case for such high ratios.
This short video from the think tank, High Pay Centre is thought provoking:
The charity sector seems to be more in line. According to an analysis by The Times in Dec 2015 that scrutinised executive pay at Britain's 1,000 highest-earning general-purpose charities, 1,080 executives across 390 organisations receive salaries of at least £100,000. 12 of these receive salaries in excess of £300,000 whilst the average salary in the charity sector is said to be £20,000 - a ratio of 15:1.
So could we change the policies on executive pay?
There is currently a groundswell of opinion that executive pay has got out of hand. Shareholders in various large companies have recently voted against pay deals. The Executive Remuneration Working Group of the Investment Association which includes some of Britain's most high-profile bosses said in an interim report in April 2016 that there was "widespread scepticism and loss of public confidence" over executive pay.and current practices are "not fit for purpose" and need reform. Interestingly the banker JP Morgan is quoted as saying that no one at the top of a company should earn more than 20 times those at the bottom.
Companies should at least publish in its annual report, the ratio of pay of it's directors to either the lowest paid workers or the average salary in the company. They should also go on to restrict the ratio to something reasonable - so if the company does well, all do well. See also the blog on Pay Compare. Why not ask your company to change?
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Geoff Knott, 05/07/2016