As the FT has reported this morning:
Chief executives of Britain's top-100 listed companies earned 183 times the salaries of the average UK worker last year in spite of several large shareholder rebellions against corporate pay packets.
According to a report by the High Pay Centre released on Monday, the average pay for a FTSE 100 chief executive rose to £4.96m in 2014, up from £4.12m in the year before.
I would add that this is also despite the fact that these CEOs are by and large so lacking in imagination that they share the trend of their US counterparts to not invest but to instead accumulate what Gillian Tett has called 'zombie piles of cash'. That rather defeats the skills based argument for a 20.4% pay rise in a year.
There are four ways to address this deeply harmful increase in the income divide in the UK that is indicative of our fracturing society that a few wish to applaud. The first is to embarrass CEOs into reform. I don't see that succeeding.
The second is to change company law so that shareholders can have a real say on such issues. In particular, it may be possible to set a statutory maximum ratio for the pay differential that can apply of, say, 25 that can only be over-ridden if, perhaps, 60% of all shareholders vote with at least 40% of all shareholders in total then in favour.
Third, there are pay caps, but I don't see these working.
Finally there is a bit of tax reform that I have long advocated. I have suggested, and the TUC has supported the idea, that no corporation tax relief should be provided on any payment made in excess of ten times median pay by any company to any person in the UK. Average pay (and I am not sure if this is the median or mean: the ONS do not say so in this release) is £488 a week including bonuses, or £25,376 a year. So tax relief on all pay over £253,760 would not be given right now: call it £260,000 for ease.
The impact of this is obvious. If average CEO pay is £4.96 million and is at present subject to tax relief at 20% then the corporation tax saving is £992,000. Reduce the tax relief to being on just the first £260,000 of this sum and the additional corporation tax payable is £940,000.
Let's assume there are four executive directors per FTSE 100. Let's then assume the other three all earn half what the CEO does i.e. £2.48 million. For each of them the corporation tax cost of my proposal would be £444,000. The cost per company assuming no-one else was paid above £260,000 (which is way wide of the mark in many cases) would be £2,272,000, or £227 million across the FTSE 100.
Now that liberates some zombie cash for social purposes. Would anyone like to suggest what that sum might be used for?
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Typo I think
“earn half what the CEO does i.e. £2.48 billion”. I imagine you mean Million – Otherwise things are even worse than I imagined…
Changed, thanks
I don’t work in millions too often these days
Is this proposed just for listed companies, or also for the smaller entrepreneur in a small business?
All, in my opinion
Entrepreneurs can take dividends anyway
I am not suggesting changing that in this way
I thought you regarded taking dividends (at large levels anyway, which I assume £250,000 would be) as tax avoidance?
Why?
I have said salary substitution is tax avoidance
At high levels dividends are not salary substitution
They may need to be taxed more but that is another issue
You argue that the first three would not work. I probably agree with you.
But what makes you think capping tax relief would succeed in driving down pay, but not the others? What is so special about this measure?
It increases the cost of payment
It will indicate society’s view
It will encourage shareholder revolt
Some other ways of addressing the huge divide between CEO pay and the average worker would be:
1) Make it illegal for members of a remuneration panel to vote for the remuneration of someone on their remuneration panel – right now, executives are handing out massive pay increases to people who will, in turn, make the decision to award massive pay increases to their peers.
2) Make remuneration panels less executive-heavy. In the UK, these panels are made up of executives only (as far as I am aware). Maybe change it so that it’s just 25% executives, with 25% made up of company employees and 50% shareholders. To make sure the executives don’t appear on the panel as shareholders (given the recent spate of pay awards in shares), maybe the shareholders cannot be employees of the company? (I’d imagine the pay awards in shares have gone some way to avoid shareholder revolts?)
3) Cap executive pay increases to some other financial stats, my favourite would be the average pay increase across the company, excluding executive level, including the decreases caused by “job shedding”, so executives get (for example) no more than 2x(average employee pay increases)% increase. Alternatively, the average share price increase? (over some long term metric (10-20 years) to encourage long term planning, rather than short-termism that currently happens)
At any rate, something has to change, since executive pay seems to continuously go up by double figure % increases, while average earnings rarely beat inflation!
Thanks
The only way I can see CEO pay being returned to non-insane levels is to reform the right of financial fund managers to proxy vote on their investors behalf.
Currently pension fund managers and the like have a vested interest in higher executive pay – it drags up pay across the board including their own – and its not their own money that is paid out.
Instead fund managers should be forced to electronically canvas some percentage of their investors (lets say 2%) and vote in line with their wishes. The falling costs of electronic communication and computing power mean it can be done as an automated process, and hence done at relatively low cost.
You can 100% guarantee that there would be dramatic falls in executive compensation as a result – which is why I don’t expect this to ever be implemented (at least as things stand now).
Capping tax relief could also be combined with measures to restore shareholder rights to people who have lost them because they are investing via pensions, other collective schemes, or nominee accounts – as discussed in http://www.taxresearch.org.uk/Blog/2015/03/02/holding-pension-funds-to-account/ . That would make shareholder revolt a bit more practical.
Thanks for reminding me of that…..
Richard,
You ask “Capping tax relief on FTSE 100 directors’ pay could raise £227 million. What could that be used for?”
According to MMT ‘Taxes for revenue are obsolete’ as you’ve pointed out in a later posting!
So the answer must be to achieve lower inflation or lower social inequality!
Fair comment
alexw & Phil Lanch are definitely onto something in this thread. I once worked in a shameful job answering phone enquiries from ‘mum and dad’ shareholders who had bought into the privatisation of a utility.
Their directors wanted them to vote on a takeover offer (“scheme of arrangement”) that they had received from a merchant bank. They were offered a mix of cash and shares in the merchant bank’s infrastructure spin-off firms.
Many of the shareholders were unhappy but that was of little consequence as the corporate ‘institutional’ shareholders used their weight to ram the vote through anyway.
The merchant bank went bust in 2009 and no doubt took a lot of the small shareholders with it.
A similar thing thing happens with remuneration. The corporate shareholders constitute a private back-scratching club where they all vote each others salaries through.
Company law needs to change. From an income equality point of view though, I must say that the idea of a maximum ratio (based on the company’s median wage) is politically smart, ie. difficult to oppose. It is awkward for the Tories due to class reasons and embarrassing for a Labour politician to be defending executive pay.
Richard,
I’m not sure I was being totally serious when I said that! I’m not sure the idea of ‘no taxes for revenue’ will ever really fly with the general public. And even when we know ourselves we’ll still lapse back.
There is a way that we can say that taxation does ‘fund’ government projects and still be MMT compliant but that does have to be at the level of the diversion of real goods and services from consumption by the non government sector to the government sector.
I’m just working how to say that in the best way right now!
Best Wishes
PM
It’s all in the way you tell them!