After the EU referendum – just before she became the UK’s prime minister – Theresa May acknowledged that income disparities had led many to feel neglected and vowed to do something about it. “You might not like the vote,” said one of my relatives who had voted for Brexit, “but at least they’re listening now!”
This anecdote is rather heartbreaking, because, of course, no-one is listening. Two years on from the vote, Mrs May’s government is so embroiled in the controversial details of the Brexit deal, it has little time for anything else. The UK is more divided than at any time in recent history.
And, if anything, the income gaps have grown. Workforce wages have not recovered to the level of ten years ago, people at the lower end of the income scale are squeezed and even working people are forced to use food banks to make ends meet. At the same time the rich go on getting richer.
The average remuneration for one of Britain’s captains of industry increased by 23% last year to £5.7 million, and even the median, or middle, was up 11%. It would now take an ordinary person more than 140 years to earn as much as a chief executive takes home in one year.
In the US, the division is even starker. Chief executives of big US companies pocket 312 times average wages, with an average package of $19 million. Their pay rose by 17% last year compared to an increase in average wages of just 0.3%.
Pay scandals, tax avoidance and poor governance, have undermined the public’s faith in the corporate sector on both sides of the Atlantic. Top chief executives’ views are no longer trusted. The business community is seen as greedy and self-serving.
In my book, Are Chief Executives Overpaid?, I argue strongly that there is a direct line to be drawn between growing pay disparities in the UK and the US and the growth of populism, Brexit and the election of Donald Trump. Many people do not feel they are doing well from the current economic set-up and are looking for a change.
Huge pay gaps damage social cohesion and economic wellbeing for much of the population. Many of those corporate leaders earning the multi-millions have little concept of how people are struggling to get by – often in their own companies.
But it is not just a social problem. There are strong business arguments to be made against channelling the bulk of rewards to those at the top of the income tree. Our top business leaders are overwhelmingly paid in shares and share options, or are given performance targets linked to the share price. This gives them a very short-term focus on market movements. It does little to encourage long-term stewardship of an established organisation.
Some economists also suggest the short-term focus on bonuses is behind the slow growth in productivity and lack of investment in new plant and machinery, not to mention employee skills. If chief executives want to push the share price up, one way of doing so is to cut costs – workforce wages are a big part of the overall outgoings so suppressing them is a quick fix for a boss focused on the shares in his package.
If these packages are meant to incentivise executives and improve the way companies are run, they aren’t working. Chief executive pay has far outstripped the measures of company performance to which it claims to be tied. The business sector is on a par with its success in 1999, yet top pay has quadrupled since then.
So why do we reward our top bosses in this way? There are a number of factors driving remuneration packages ever upwards; some of them more spurious than others. Corporations have undeniably got bigger in recent years and now stretch across more borders. But the need to compete in a global war for top talent is not borne out by the numbers.
It is also important to recognise that many top bosses receive millions because they are greedy and encounter little real challenge to their excessive awards. The decline of union influence and the rubber-stamping of big packages by remuneration committees comprising people from the same business circles as the chief executive have allowed rewards to ratchet up.
Shareholders have been given powers to rein in top pay but have proved either unable or unwilling to do so. They cannot be expected to hold companies to account on their own, not least because pay in the fund management business is also exploding.
I would advocate the inclusion of members of the workforce on remuneration committees, boards and a company-wide vote on top pay. It would help if packages were stripped back to basics, with directors paid in cash like the rest of the workforce and forced to buy shares with their own money if investors wanted them to.
We also need to foster a different corporate ethos that has broader societal goals, instead of just using companies as cash machines to generate profits for shareholders.
In a recent TV interview, one of the UK’s top corporate bosses stalked off after being asked about his £75 million bonus. This attitude reinforces the idea that the super wealthy live in a parallel universe. If we can’t achieve a fairer distribution of income by changing the way our companies work, and people continue to see capitalism as rigged, then they will be tempted by more radical alternatives.