Executive pay: the politics of envy or a crisis of capitalism?

By Tess Lanning

Politicians and business leaders often dismiss concerns about rising executive pay as the ‘politics of envy’. It’s poverty that matters, they crow. Why begrudge people who do well?

But new research published this week reveals widespread consternation about the structure of pay in the UK. Polling by IPPR shows that two thirds of people believe the gap between the highest and lowest earners in their workplace is too large. When asked what the salary of a CEO of a large national company should be, the average answer was £350,579: 65% less than they actually earn. Top pay in the public sector is also seen as too high, with people believing that the CEO of a large council should be given a 24% cut.

Over the last few months we’ve talked to people on a range of incomes to understand what drives public anxiety about pay. Many people we spoke to questioned the increasing focus of rewards on a small number of people at the top. They felt that this fails to reflect the contribution that employees at all levels make to a company.

Their instincts are right. Over the past three decades the salaries of top earners have grown at a much faster rate than those of low and middle earners. Yet there has been no proportionate rise in company profits or increase in the demands placed on executives. Senior managers have gained disproportionate power over their own – and their employees’ – wages, and as a result are enjoying a larger slice of the wage bill.

We also spoke to people who saw no problem with the way pay works at the moment. In particular many high earners working in the private sector argued that boards must pay top whack for ‘stardust’ individuals. Yet even these high earners, some of them earning as much as £250K, agreed that performance-related pay is a subjective process, often influenced by personal relationships. Little wonder that lower earning participants in our research felt helpless against the demands of big business, noting that salaries in the boardroom continue to soar in a context of widespread wage freezes.

How do we fix our broken reward system? Companies that share profits on a more equitable basis emerged as national treasures in our research. Again and again people referred to the John Lewis Partnership model, where organisational profits are shared among all workers using a fixed percentage of basic salary.

A far cry from the shareholder capitalism that dominates in this country, John Lewis’s Council of elected employees has the power to approve and influence decisions. With the decline of unions, structures that give employees a voice such as this are rare. Yet in some countries democratic governance models are the norm: in Germany workers in all but the smallest businesses have the right to elect a Works Council, which must then be consulted on decisions that will affect them. Executive pay in Germany is more restrained than in the UK.

The lesson is that a key strategy should be to improve accountability between managers and the rest of the workforce and give staff more of a say in how pay is set across organisations.

While politicians shy away from measures to prevent market folly, more than three-quarters (78%) of the British public would support government action to reduce the gap between high and low earners, with 82% of those saying the government should act in both the public and private sectors. People we spoke to argued that it is the job of government, not to the market, to ensure fair pay. Whitehall take note.

Tess Lanning is a researcher at IPPR www.ippr.org