CEO pay in the UK is spiralling out of control. The median FTSE 100 boss now takes home £4.5 million a year – while millions struggle to live on the minimum wage. If we can set a minimum wage, why not a maximum pay cap? In this video, I explore why inflated executive pay is unjustified, how it fuels inequality, and how a cap – at around £370,000 – could rebalance our economy. Would a maximum pay cap strengthen fairness, rebuild trust in business, and restore democracy? Watch to find out – and let us know what you think in the poll.
This is the audio version:
This is the transcript:
Do we need a maximum pay cap in the UK?
I ask the question because in a whole series of videos on this channel, we've been looking at the problems that excessive wealth creates in the UK. And one of the problems that is created by excessive wealth is the fact that some people have vast amounts of income in this country, and a great many people are living on the minimum wage, or less. The consequence is massive inequality, not least because the minimum wage is just not enough to live on in the UK.
So, if we can set a minimum wage in the UK, why can't we set a maximum pay cap? That's the question that I'm going to be asking in this video.
The reality is that in most large companies, and it is by and large, very large companies who pay the sorts of money that we are talking about here - banks, large quoted companies who are on the stock exchange, big supermarkets, big drug companies, things like that - those companies are managed by people who like to call themselves risk takers and entrepreneurs. But the truth is, they are no more risk takers than the person who is working on their shop floor, whether that is literally the shop floor in a factory, or the shop floor in a shop, or wherever else they might be in their organisation.
They are simply salaried employees with all the protections that go with that: good pensions, probably excessive pensions, and very strong contracts, which require them to be compensated very well if they leave early. These rewards are not in any way linked to risk because the fact is, they're going to be paid month in, month out, whatever they do during the course of their employment.
So these inflated pay packages are utterly detached from contribution or need, and yet they create massive inequality in our society.
They skew company resources towards the few at the top.
They undermine morale because of the massive pay differentials between the top of a company and the bottom of a company, with very often chief executives earning more than a hundred times a year than those who are at the bottom of the organisation get.
And those pay gaps fuel inequality across our whole society, not least by highlighting how divided the world is, but they also create concentrations of wealth, distorting housing, rental housing through the buy-to-let market, finance and politics. All of that is deeply detrimental to well-being in this country.
So let's just look at some data. The UK minimum wage now pays, on a full-time salary, depending upon the number of hours worked a week, between £22,000 and £25,000 a year. That sounds a lot to people of my age. My first annual salary when I started work just a few years ago now, was £3,000 a year. So in the circumstances, £25,000 sounds extraordinary. Except I could make ends meet on £3,000 just about, and frankly, on £25,000 a year now, you would struggle. It is impossible to sustain a decent family life at this level.
But the question is, if that is the floor, what should be the ceiling, and why haven't we got one? This is a question about justice, cohesion, and economic balance.
Let's look at some suggestions on the ratios between minimum pay and maximum pay that have been made by some organisations.
The High Pay Centre has existed for years in the UK, a think tank that looks at this issue day in, day out, all year round, and it's done excellent work over many years. It suggests a ratio of ten-to-one in the UK with regard to pay in an organisation. The highest paid person in an organisation, they say, should be paid no more than ten times the pay of the lowest paid person in the organisation. And presuming that the lowest-paid person is therefore on the minimum wage, we'd be talking about a maximum pay of around £250,000 if we use their guidance.
Some time ago, when I was working for the Trade Union Congress, the TUC, I wrote a suggestion for them on ratios to median pay. And I suggested another ten-to-one ratio. But I suggested that the minimum wage shouldn't define this and that the median wage in the UK should, and the median wage now is around £37,000 a year. That would suggest that nobody should be paid more than £370,000. The advantage of this number is that it is not dependent upon what is happening inside one company, but sets a general limit. And I actually favour this higher figure. I think it's absurdly generous, but it's still an effective limit. And I challenge anyone to argue convincingly that more is necessary.
But let's just look at what is paid. If we look at the companies who are in what is called the FTSE 100, the Financial Times Share Index for the top 100 companies in the UK, the median chief executive of a company in that index is paid £4.5 million a year. If we look at the mean, that's the average in mathematical terms, the one that most people think of is the average, it's £5.1 million a year, a sum of money that is so far beyond most people's imagination, and so far beyond anyone's need, that it is quite out of touch with reality.
No wonder so many of these companies seem to be so remote from us and so remote from serving our needs.
The median value of other directors in those companies, the top 100 companies in the UK, was around £2 million a year.
So even if you weren't the ultimate boss, you just sat on the board, you were getting paid something like £2 million a year for turning up to work when many people will only be getting between £22,000 and £25,000 a year, and many of those people might be getting a state subsidy for their wages because the company they work for can afford to pay the boss £4.5 million, but can't afford to pay them enough to live on, and they require universal credit to make good their wages.
The average ratio, at the moment, of a chief executive to the minimum wage is around 180. To the median wage, it's around 120. And for directors who are not chief executives, the ratios are 80 and 54 to the median. It's quite extraordinary.
It isn't possible to talk about these sums being needed. It's just not the case that they are. But before we go on and discuss just what it is that we're going to cap. Let's be clear about what counts as pay. What I know from my experience of watching accountants, companies, lawyers abuse every tax rule and every regulation that comes their way, and that is the habit of some of them - they see that as their job to subvert the law - they will, unless pay is incredibly tightly regulated, do their very best to try to get around any figure for pay which simply represented the figure that was on the pay stip at the end of the month.
They would say, "Well, that's what you call pay. That's what we'll limit. But instead, we'll give people enormous bonuses. Or we'll give them perks, like very expensive cars or planes. Or we'll pay for their housing, or we'll provide them with an enormous pension. Or we'll give them big share options schemes, which they will be able to cash in one day, but which aren't part of their pay now." All of these are possibilities. And the reality is, all of these things are pay. And they must therefore be included in any pay cap. It's absolutely critical that we look at this.
And it would also be necessary to look at the abuses that are possible if companies spun their directors out of their organisations and put them into separate entities, like limited liability partnerships, where lawyers and accountants can, for example, earn millions a year now. That's an issue which will also need to be looked at, but we won't go further on it here.
The point is, we need to prevent avoidance. Companies must be prevented from paying special dividends on shares owned by directors; making loans to directors that are tax-free; or supposedly paying their own companies with very high rates of interest for loans that they advance; or by renting properties from them. All of these things have been seen. All of these things are possible. All of these things must be stopped. All of these things must be included in a pay cap.
And we have to apply this pay cap to every single public interest company in the UK. Now, public interest companies are, by and large, the quoted companies from which you buy very many of the things on which you are dependent. But it also includes things like very big charities and universities, who now pay ridiculous salaries to some of their vice-chancellors and other senior executives. And also, to housing associations, where it appears that high pay is now also a creeping phenomenon, even though they're meant to be providing services for people in need.
The fact is, all of these entities must be covered because the pay cap has to be enforced if it is seen to be fair.
And penalties must be applied if breaches are seen.
There's a particular problem, though, with regard to private companies. These are those which are owned and created by a person who might, as a consequence, make a very large income and say, "But it's mine. I set up this company." And this is problematic and isn't the same as the situation of a public interest entity, where, as I explained earlier in this video, those people who work for them are almost entirely straightforward employees, just the same as the vast majority of their other staff are.
That's not true in some private companies. These people actually are entrepreneurs. But in those cases, there has to be something else, and that is that there has to be a cap on the amount of pay that can be made to a person on which tax relief can be given. So if we choose a pay cap of £370,000, the company, a private company, could make a payment to a director of as much as it liked. But it would only get tax relief on the first £370,000, and that will effectively increase the cost of the payment to the director in question. In other words, it will simply make the price of inequality higher for those who are benefiting most from it.
Now I know the arguments that will flow from this. People will say "Talent will flee", but the argument is simply not credible. If you really think that the future of the UK is dependent upon a handful of incredibly highly paid people whose greatest skill in life is manipulating the companies that they work for to pay them returns way in excess of what they're worth, then you've got a very distorted view of value and frankly, of talent.
There are vast numbers of people who could do the jobs of our chief executives, our finance directors, and everybody else in large organisations, and they would do those jobs for much less than £370,000 a year.
So I have absolutely no doubt that new talent, maybe better talent, would come forward if only we got rid of those who are the manipulators now.
The fact is, pay caps will strengthen trust in business and democracy and make talented people want to work for them.
They will then realise that their companies can redirect money towards investment, wages, and society. And the gain will be a rebalanced society, which recognises that everybody contributes to our well-being.
Pay caps are a tool for economic justice, tax justice, and accountability. Wealth should serve the economy and not dominate it. And a maximum pay cap is both fair and workable. So long as, and I make the point again, it is comprehensive, meaning that we must close every loophole.
In that case, let's aim for rewards that reflect contribution and not privilege. And tackle this source of wealth inequality once and for all, and without having to use tax very much to do so, because this is a problem that arises before tax ever comes into the equation, and tax should not therefore be the solution to it. Regulation should be.
What do you think? Do you think we should have a maximum pay cap? Do you think it would be fair? Do you think it should be at £370,000 a year as I've suggested in this video? Or do you need more information?
Let us know. There's a poll below. And we'll be interested to hear what you have to say.
Poll
Should the UK introduce a maximum pay cap?
- Yes – at £370,000 (10x median wage) (67%, 183 Votes)
- Yes – at £250,000 (10x minimum wage) (17%, 47 Votes)
- No – let the market decide (9%, 25 Votes)
- I'm unsure and need more information (6%, 17 Votes)
Total Voters: 272
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I support your initiative, Richard, but please don’t forget us pensioners…
I receive – from the state pension plus two very small private ones – a total of about £13 000/y. I own my home and run a cheap car (not often).
This is an entirely miserable amount (the worst pensions in Europe, apparently), and I know I am better off than some of my neighbours!
Recent inflation has made coffee shops and other small ‘luxuries’ unaffordable.
How about pensions etc being set at 80% of the ‘minimum’ wage?
I support the idea
Why not 125% of the national minimum wage? More if you’re in a deprived area in order to level up the country.
Why?
Pensioners have lower costs.
At the expense of complicating the message and possibly introducing the possibility of abuse what about setting the maximum pay as a multiple of the median salary in the Company?
Clearly if I run – say a retail chain with large numbers of low paid workers why should I get the same salary cap as the CEO of (simply as an easy to understand for example) Rolls Royce which has large numbers of highly paid skilled workers.
It would clearly act as an incentive to increase pay levels in the business.
I don’t know if its still the case but I believe in the US at one stage ‘Executive’ Pension Plans were not ‘tax exempt’ or whatever they do there, to qualify for exemption pension schemes had to be open to the whole of a Company’s workforce
I allowed for both options.
But I prefer a nationally based cap.
An excellent video and what a way to start the week. I would begin by introducing a pay ceiling on university vice chancellors and bosses of privatised utility companies for starters. They have no justification for their high rates of pay.
I support the idea but oh how they will HOWL with rage.
They won’t “argue”against it, just howl – communism! – socialism! – class envy! – any smear available.
An aggressive defence strategy would be necessary focussing on the actual harm caused by excessive high pay and inequality, and exposing the extent of it.
I’m thinking of the vitriolic reaction to Corbyn’s “free (communist) broadband” as an example of how the policy would be attacked.
I’m imagining the Horizon or Grenfell inquiry videos being shown again with people’s annual incomes on display next to their names… or party political broadcasts or news bulletins where all the presenters & interviewees earning more than median income, have that displayed on screen. Especially Fa***e, on BBCQT.
The sort of risk we should take.
If, as it seems, the poor do not cause/fuel excess inflation and money in excess of resources causes/ fuels excessive inflaton, might managinging maximal pay contribute to better management of excessive inflation and so contribute to the cohesion and sustainability of our society?
Yes
Reference your later post re -Henry Ford,
If the CEO excessive pay of all of these companies was to be cascaded down to the general workforce, then it may help the demand for its products.
Agreed
I used to work in the railway industry, pre and post privatisation. In the early 2000s, I was on about £25,000 a year, working in recruitment and training of front line people.
Our CEO, a great man called Christopher Garnett, was on £250,000 a year. Once, at an open session during an employee conference, he was asked by a member of staff why he got paid so much.
He explained that he was responsible for the safety and wellbeing of 3000 staff, and he was ultimately responsible for the safety of 15 million passengers a year.
I think he was worth £250,000, but certainly not worth more than that, and he was an excellent boss, the best I ever had.
Nowadays you have the CEO of Barclays telling the government to cut public sector pay if they can’t balance the books!
I too support a maximum pay cap as per your suggestion. However, you had previously written (I think) about how the very wealthy don’t use money in the way we ordinary mortals do – ie they don’t spend it particularly. What they seem to do though if I’ve understood correctly, is use it to “keep score” of their place in the rich-list pecking order.
Perhaps something beyond the pay cap and money is needed to keep the supposed talent and keep it striving in some capacity. Say a published list of rewards for certain objectives being met? As an example; a company who increases productivity by some commonly agreed measure and also narrows the pay gap between bottom and top (ie more of the productivity gains go to the lower paid) may ‘earn’ three free tickets to a prestigious event with some kind of luxury meal – and this would be say 16th in the list of rewards. the CEO, CFO and A N Other could then rank themselves against the same of a different company who had ‘earned’ the reward associated with 4th place in the list.
I’m thinking along the lines of the Times Rich List (I despise it, but there it is) that allows them and us to see who fares better and worse in non-monetary terms. Probably a totally mad idea I admit – and almost certainly impractical; but I’m on holiday currently in Somerset, and I think the rain has turned my head!
There is logic in that. I like it. Enjoy Somerset
Thanks for another thought provoking article. 🙂
I have given some thought to what should be defined as pay. There are, as you say, many ways to gain from employment without it being a direct salary. My best definition of pay is: “any money or asset acquired that would not have been acquired save for being employed, directly or indirectly, by a person or organisation”. This definition would include shares, bonuses, being paid in gold, being contracted from a partner, or deferred pay. It is not perfect. It probably needs tweaking, but it suggests to me that a comprehensive definition of pay is possible.
But I don’t agree with a pay cap. I think there are practical difficulties, as there are with trying to implement a wealth tax. And I think that it has the whiff of authoritarianism. Instead I think we should limit excessive pay the same way we can limit other externalities and social evils (such as tobacco, alcohol, ultra processed foods, pollution etc). And that is via tax. There is, afterall, a certain “joy of tax” 😉 . But this tax should not be income tax, it should be a tax on employers who pay the excessive salaries. We already have such a tax that could be pressed into service for this purpose, national insurance.
National insurance could increase steeply as pay increased. For example the rate could double for every multiple of median earnings. The crucial difference between this and income tax is that, because it is an employers tax, it can increase beyond 100%, of salary, which is crucial in limiting high pay. It has the advantage that income tax can always remain at a “reasonable” level forestalling arguments about the fairness and excessive tax (and avoiding the inevitable, though false, arguments about the Laffer curve).
Companies claim that they must pay high salaries to compete. I don’t believe that. But if it’s true they can pay huge employers tax if they really feel it is necessary (they won’t). It seems to me a highly progressive employers tax would limit high pay naturally, without the need for a cap.
So, we agree that pay is excessive, but I think it better addressed via an employers tax rather than via a cap.
I can’t see any of our political parties introducing this! Would it be more palatable if companies were allowed to pay CEOs what they wanted to (as now) but that they had to pay 100% Employer’s NI on anything over the cap? Over time, this would be likely to reduce CEO pay. Personally, I agree with you that it should be reduced immediately but, politically, I can’t see that happening.
Unless you ask you cannot get.
An excellent book on a similar idea here
https://www.penguin.co.uk/books/451473/limitarianism-by-robeyns-ingrid/9781802060478
I have read the intro.
Piketty’s analysis is interesting here – as everywhere. He notes the evidence is that very high marginal tax rates have generally good effects. There is simply no evidence, from real times and places where they have been applied, that the theorised adverse consequences (such as disincentivising enterprise or commitment) have actually occurred. Rather, what happens is ‘predistribution’ – companies simply stop paying very high salaries or other excessive benefits, and instead reinvest – this being one of the reasons why in the real world very high marginal tax rates have generally been associated not with lower, but with higher growth rates.
I wonder if you would think differently if you or your sons had the capability to earn say £500k pa. The fact you don’t must surely influence your reasoning?
I had the capacity to earn millions.
I have no doubt I could have been a partner in the Big 4 accountants.
I did not want to do so. I positively rejected the option.
I see no justification for that pay rate.
What are you saying? My guess is you are disguising the politics of envy that you probably suffer from, but which I don’t.
How about many things to be a proportional of the min wage?
Min Wage to be the tax free base.
Min Wage to be the national pension.
All salaries to be defined proportionally of Min Wage. So the contracts to say 3xMin Wage (whatever it is and will be), instead of stating a number that will mean nothing next year because of inflation.
Min Wage to be automatically adjusted for inflation and/or productivity and this will drive automatically salaries and pensions and tax thresholds and many other things can be linked as % of min wage, as rents, mortgages, other forms of taxes and fines.
This will end once for all microbargaining that has damped the salaries the last decades.
It’s worth modelling, but there are serious limitations in some of agar you propose as well as total financial collapse, so wga5 you are suggesting could not happen except over many decades.
I find it ironic that when anyone makes the accusation that those who wish to curtail outrageously large salaries and other benefits are pursuing the ‘politics of envy’ because they reveal themselves to be pursuing the ‘politics of avarice’. In today’s world how can anyone be worth, or said to justifiably ‘earn’ billions of pounds?
Hurray for this. I have always regarded the argument that “talent” has to be paid at a rate which will attract international competition as spurious and self serving. We have been doing this for some considerable time now. if it was such a good idea why is our economy in such a mess? Time to try a different way. Is there a shortage of people wanting to fill such roles? I have not heard of it. I have heard, however, of A&E consultants and maths teachers looking for work abroad. The argument that talent has to be rewarded or else they will not work here seems only to be applied in certain circumstances.
A wage cap just wouldn’t work in practice and would not be easily enforceable. Presumably, it would apply to sports people? If so, that would be the end of the Premier league football as we know it which brings immense happiness to thousands across the country. Nice idea, but let’s face it will never happen
Premier League football is unaffordable for most people. Its demise would be of considerable benefit. It is no longer sport or anything remotely related to it.
Fundamentally disagree, of course its sport and is watched by millions across the globe because it has the highest quality football on the planet. You’re obviously not a football fan. You’ll also be very surprised how many pay for tickets who you say can’t afford to go. Go and watch Sunderland, nearly all their 40,000 attendance is working class – so how does that work then.
I have supported Ipswich Town since 1973
I know how much healthier football was then
I once overheard two old boys in a pub discussing what they earned in their first year as apprentice joiners. This was in the context of a grandson who had just got his first job. They used the price of a bottle of Guinness as the inflation indicator.
It turned out that an apprentice in 1959 could afford almost 3 times more Guinness than one today.
Why is it deemed ok to pay massive salaries to CEOs etc, while their workforce can be on minimum wage and having to claim universal credit? Surely any government should not be subsidising large companies which can so obviously pay their workforce more,