Time for action on fat cat pay

On the day most workers in Scotland returned to work, FTSE100 CEO’s had already been paid more than the average worker will earn this year.

Fat Cat Tuesday is a useful way of highlighting just how far corporate pay has spiralled out of control. The average FTSE100 CEO pay is now almost £5m, a ratio of 183 times the pay of the average worker. As the High Pay Centre director Stefan Stern said: “‘Fat Cat Tuesday’ again highlights the continuing problem of the unfair pay gap in the UK. We are not all in this together, it seems. Over-payment at the top is fuelling distrust of business, at a time when business needs to demonstrate that it is part of the solution to harsh times and squeezed incomes, and is promoting a recovery in which all employees can benefit.”

This isn’t just a matter of fairness – it has negative consequences for the workplace. The CIPD has recently published a poll on what employees think about high pay. It shows that workers don’t buy the inspiration argument and feel high CEO pay demotivates them and damages their organisation:

• 71% agree that CEO pay levels in the UK are generally too high (while only 5% disagree). 
• 64% disagree that CEO pay levels in the UK inspire employees to work hard (while only 8% agree). 
• 60% agree that CEO pay levels in the UK demotivate employees (while only 13% disagree). 
• 54% agree that CEO pay levels in the UK are bad for an organisation’s reputation (while only 11% disagree). 

Not for the first time the gut reaction of workers is spot on. There is little evidence that paying more results in better management.

One solution is to make it a requirement that organisations publish their pay ratios. This would automatically integrate pay at the top into an organisation’s formal pay scale. Peter Marsland explains how this can be done in the High Pay Centre’s recent publication ‘Pay Ratios – Just Do It’. He demolishes the standard arguments against this approach – it’s too difficult, to onerous. This is data employers should have, and calculating the ratio ought not to challenge anybody with a decent pass in National Grade maths. 

Peter doesn’t go as far as recommending a particular ratio, arguing that all organisations are different. The primary aim is transparency and even in the free market USA, the Securities and Exchange Commission supports this approach. Those organisations who have adopted a ratio have taken pretty high figures. For example, at John Lewis it is 75:1, at the TSB 65:1.

Just before Christmas, the Scottish media reported that there are at least 64 employees in the Scottish Government, its quangos and other public bodies being paid a minimum of £100,000, according to statistics obtained by the Scottish Greens. 

In fairness, most of these senior staff manage large organisations and their pay ratios are well below their private sector equivalents – a 10:1 ratio wouldn’t cause much pain at the top of the Scottish public sector. Even so, there have been efforts to copy the private sector in recent years with the introduction of bonus systems. The voluntary sector has come under similar scrutiny.

The evidence that staff are less productive in organisations that have big gaps between top and bottom pay and where decisions on pay are felt to be unfair also applies to the public sector. Interestingly, the CIPD survey asked respondents about ratios of 5:1 and 10:1 – far removed from the private sector norm.

The Hutton report for the Treasury on public sector pay found that: “A wide range of academic studies [...] suggest there is a strong correlation between narrower pay dispersion within an organisation and improved organisation performance [...] wide gaps between top and bottom pay within an organisation harm performance [...] there will be gains to morale and productivity in organisations where everyone is seen to be paid according to their contribution” 

The growing problem of high pay reflects the damage inequality does to our society. It also damages organisational performance and the reputation of organisations. Improved transparency through the publication of pay ratios is an important starting point. However, while one size shouldn’t fit all, maybe it is time for the Scottish public and voluntary sector to lead the way by establishing pay ratios. Perhaps something the Fair Work Convention should be considering?