The Unfinished Business of CEO Pay Reform in the UK

“We win the lottery every year.”

That was the candid, off-the-record remark of one CEO I spoke to a while ago about the pay of FTSE100 company bosses. In their hearts, these bosses know the gap in pay between the top and the average worker — let alone between the top and the lowest paid — cannot be justified. At around 120:1, the UK’s ratio between the top and the middle has roughly tripled in the past 20 years.

Are today’s bosses so much cleverer than their predecessors? Are they doing a much better job? Has the job of CEO got so much harder? Of course not. Top pay is a broken, rigged system. And even the lucky winners in this game don’t always feel good about it.

How and why has this come about? It’s tempting to note that the great growth in top pay kicked in roughly around the time of the fall of the Berlin Wall. As the “rival” economic model finally imploded, the capitalist restraints came off. Since that time executive pay has spiraled ever higher upwards. As the GMB trade union pointed out last week, if the UK’s national minimum wage had grown at the same rate as CEO pay it would now stand at almost £13 (US$17.58) an hour.

Fat cat pay is a systemic problem. There is no one single element at fault. Rather, as in Murder on the Orient Express (spoiler alert), it is all of them: boards, shareholders, pay consultants, headhunters, and the CEOs themselves.

And the missing link? It is, of course, the voice of the workforce. No one around the compensation committee table is a “shop-floor” worker or even someone with a more normal, grounded view of what a fair pay deal at the top might look like. Everyone in the room, currently, is very highly paid. Inevitably they are desensitized as to the impact of excessive pay. The Comp Committee should be the place for a much more broadly based and more constructive discussion about how people are valued and managed at work. It shouldn’t just be an extended, agonized chat about how to dissuade an already overpaid CEO from flouncing out.

The UK government’s decision to make the publication of pay ratios compulsory is a welcome development. But more reform is needed, not least the introduction of employee representatives on the compensation committee. But as excessive pay at the top is a systemic problem, it follows that all elements in this system have to raise their game significantly. No more spouting of tired and flimsy arguments about the “global war for talent” or “the rate for the job.” Executive pay is not an act of God or an irresistible force: it is a choice made by the financial elite. Of course, CEOs could help the situation by refusing to take such big salaries in the first place.

In 2018 concerns about wealth and income inequality stand at the very top of the UK political agenda. If business leaders are unhappy about the rise of populist revolts, as manifested in the election of Donald Trump or the vote for Brexit, then they might be advised to moderate their behavior and their expectations on pay.

And, more importantly, there is another, quicker way of reducing wage inequality, which is to give the lower paid a much-needed and long overdue pay rise. This really isn’t very complicated, regardless of what the financial masters of the universe might tell you.

Stefan Stern is the Director of the High Pay Centre, a UK-based think tank established to monitor pay at the top of the income distribution and set out a road map towards better business and economic success. This commentary was originally published by the Centre for Labour and Social Studies.