A blueprint for a High Pay Commission

By Joe Cox

A year on from the collapse of Lehman Brothers and it appears little has been learned. Whilst the government boldly led a rescue of the failed private banking system the fundamental questions about the effects of high pay on our economy and society remain unanswered.

In our new online publication we argue that there is a compelling case for examining the effects of high pay on our economy and society through a High Pay Commission. The five key reasons being:

1: The link between excessive pay and the economic crisis is now widely acknowledged. According to the House of Commons Treasury Committee’s report Banking Crisis: reforming corporate governance and pay in the City, “the ‘bonus culture’ in the City of London, particularly amongst those involved in trading activities in investment banks, contributed to excessive risk-taking and short-termism and thereby played a contributory role in the banking crisis”. Despite this there has been no major reforms to rein in or even scrutinise excessive pay.

2: A major justification for high pay is that it is the result of high performance. There is a growing body of evidence that suggests that the link between pay and performance at the top is unproven. In 2008 FTSE 100 chief executives saw their basic salaries increase by a massive 10% despite plummeting profits and dividends. We have witnessed the biggest economic downturn in our lifetime but the structure that keeps the well-paid insulated from economic failure remains.

3: The gains from higher productivity have been increasingly siphoned off by the super rich since the 1980s. The share of GDP going to profits has continued to rise while at the same time there has been a decline in the share allocated to wages. The reduction of the relative share of labour in national income has led to a reduction in aggregate demand. In short, if profits and output rise faster than wages, who will buy the output? Demand was kept up in the short term by increasing the supply of credit and keeping interest rates low, but this is not a sustainable economic model.

4: Due to the huge collapse of the financial system, large swathes of the banking system are now in public ownership. Despite this, the culture of high pay has been reinforced in the publicly owned banks. Stephen Hester, CEO at the Royal Bank of Scotland, has a potential salary package of £9.6 million and these £1 million plus remuneration packages are not confined to the chief executive. This raises very real questions about taxpayer value and democracy. When such huge pay packages are awarded should there not be transparency?

5: There is a clear public interest and support in controlling excessive salaries. Indeed polling commissioned by Compass shows that 63% support establishing a High Pay Commission. 78% agree that the growing gap between rich and poor is bad for our society and 73% would support the government in imposing a new tax on all bonuses above £10,000 a year.

This is an issue not just of sound economics but of democratic principle. No one can be beyond restraint if their actions harm others.

Download the Compass Blueprint for a High Pay Commission here.