Denise Kingsmill: Minding the pay gap

Pay disparity is becoming a hot issue in the age of austerity, with even the Chancellor weighing in against excessive rewards.

by Denise Kingsmill
Last Updated: 25 Jan 2011

How much do you earn? This is a question rarely heard in British workplaces. In fact, we are more likely to talk about our sex lives than disclose what we get paid. Many companies have employment contracts that ban employees from discussing their pay with colleagues. It is not clear why this would be so threatening but presumably the fear is that transparency will cause an upward pressure on pay rates. Although there is no clear evidence that supports this, there is plenty to suggest that secrecy around pay encourages suspicion and a sense of unfairness.

And with good reason for some - especially women. Lack of transparency in wage rates is in part behind the average 20% gender pay gap. It certainly makes it more difficult to raise awareness of pay inequalities. How can you find out if you are paid fairly when you are not allowed to ask? With this in mind, home secretary Theresa May, who is also the Coalition's minister for women, has confirmed that the new Equalities Act 2010, the swan song of the Labour government, will make 'gagging clauses' unenforceable.

This may make equal pay claims easier to establish but it is unlikely to make much difference to the other pay gap - the huge and growing disparity between the pay of those at the top of an organisation and those at the bottom.

The recession is creating increasing pressure for more disclosure around pay. Will Hutton, executive vice-chairman of the Work Foundation (whose book Them and Us is reviewed elsewhere in MT), has been asked by the Government to look at fair pay in the public sector. It is interesting to note that in the Treasury press release announcing the Hutton review, he refers to making recommendations 'rooted in the tried and tested principles of fairness', while the Chancellor firmly directs him that 'there is no reason why managers should be routinely paid more than 20 times the wage of the people working in the organisation'. Not a lot of wriggle room there.

Additionally, there seems to be a growing sense that no public servant should earn more than the prime minister, whose pay is stuck at £142,500 (including £65,757 as an MP) after many years of his predecessors refusing the pay increases recommended by the pay review body. This isn't much when compared to the average FTSE 100 chief executive but then, given that the PM also has access to a range of fringe benefits on which he pays no tax, including a prime London residence, a country pile, chauffeurs and other domestic staff, his 'pay' starts to look much more attractive.

Furthermore, if his likely post-tenure earnings are taken into account, he doesn't have to be a Tony Blair to be pretty much guaranteed millionaire status. Nevertheless, the 170 civil servants who have been identified as earning more than the PM's basic are considering their future. I am aware of more than one public sector director general who will refuse promotion if this restriction is enforced. The media furore aroused when it was disclosed that primary school head teacher Mark Elms earned more than £200,000 abated only when parents at his school made it clear they thought he was worth this and more.

Public servants are used to their pay being disclosed but it is strictly counter-cultural in most private sector organisations. So much so that there are many instances of people preferring not to become board directors (whose pay must be disclosed under corporate reporting requirements) in order to keep their pay secret. There are many such employees, particularly in the financial sector, who prefer to remain below the radar. It was for this reason that Bob Diamond, the recently appointed CEO of Barclays, did not actually join the board until he was forced to do so in 2004 amid growing concerns that his influence in the bank was so great that he was in effect a shadow director.

As he moves into the top job he will take a pay cut, dropping from £18.19m in 2009 to £11.48m, including deferred compensation. This will not be too much of a sacrifice, however, given that he is estimated by the FT to have earned in excess of £100m over the past four years, despite that time including the worst years of the global financial crisis, when thousands of people in the sector lost their jobs. Even so, he is unwilling to contemplate government restrictions on bankers' pay, issuing the now familiar threat that the banks will take their business elsewhere if the 'tried and trusted principles of fairness' are applied to them.

In the US, there is the beginning of a legislative fightback against the ever-increasing executive pay gap, with the Dodd-Frank Act requiring companies to disclose the ratio between the earnings of the CEO and the median employee pay. There are, of course, problems with this, as there is a considerable difference between median and average pay, but it is a start, even if many believe that companies will get round the legislation by outsourcing the jobs of the lowest paid.

Perhaps in the UK we could extend Hutton's remit and ask him to consider how to ensure that no bank chief can earn in total more than 20 times the highest paid public servant. Or even more radically, remind everyone that earnings of £50,000 have been found to be the optimum amount to ensure human happiness. While this may comfort some, it is not likely to reassure either those on the UK's average wage of £26,000 or Bob Diamond with his mega-millions.

- Baroness Kingsmill CBE has been a non-executive director of various private and public boards. She is a non-executive director of British Airways and Korn/Ferry International

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