Fat cat earnings are eating away at Britain's economy

'Corrosive' pay increases for UK executives are creating dangerous inequalities and are bad for business, says the High Pay Commission.

by Rebecca Burn-Callander
Last Updated: 19 Aug 2013

At the CBI Annual Conference yesterday, director-general John Cridland warned the assembled leaders over the dangers of alienating the public with excessive rewards and grubby dealings. It was a departure from the usual gung-ho ‘Once more unto the breach’ rhetoric from the CBI. Perhaps Cridland had been briefed by a little bird on the High Pay Commission’s findings.

Following a year-long enquiry into pay in the UK’s top companies, the Commission has today announced that despite the economic downturn, executive pay in the FTSE 100 has risen an average of 49%, compared with just 2.7% for the average employee.

Even the boom times of the eighties fade into oblivion next to the inflated pay packets of fat cats today: earnings have risen 4,000% in just 30 years.

So, how have such huge inequalities been allowed to develop? The standard argument for spiralling senior pay is that firms do what is necessary to compete for the top people on what is now a global market for leadership. By always benchmarking upwards, rising boardroom pay thus becomes a self-fulfilling prophesy, a positive feedback loop which drives salaries ever higher. But this justification is not well supported by the facts, says the High Pay Commission, whose findings are that global mobility is actually very limited.

But why exactly does the Commission think that these pay rises, large as they may be, are so dangerous? If you do a good job you should be well rewarded for it. Well, for starters, there’s the pernicious question of rewards for failure – looking around at the wider economy, there don’t seem to be too many firms which are doing so well that their bosses deserve a 49% payrise, so something’s amiss there.

Then there’s the impact that super-high wages in some specific areas – the City being everyone’s favourite example – are having elsewhere, drawing talent away from other perhaps more useful macroeconomic endeavours. Who wants to earn pittance as an engineer when you could join an investment bank and retire at 30?

Not to mention the risk of an executive pay ‘bubble’- where values become so disconnected from reality that the market collapses. The Commission reckons this is a real possibility, not least because of the lengths firms go to in order to avoid full disclosure on pay, and the proper market scrutiny this would entail.

But High Pay Commission chair, Deborah Hargreaves, puts her finger on perhaps the most widespread societal objection to such huge disparities: their contribution to the breakdown of trust in big business by the general public: ‘The British people believe in fairness,’ she says. ‘Yet, at a time of unparalleled austerity, one tiny section of society – the top 0.1% - continues to enjoy huge annual increases in pay awards.’ It’s hardly an exemplar of the ‘We’re all in this together’ spirit of which so much is made at present, is it?

Even PM David Cameron seems to recognise that all is not well, although he chooses his words with care saying, ‘Everyone, whether they are in public life, whether they are in private enterprise, they’ve got to be able to justify the decisions they make about pay.’

Who can argue with that? The trouble for Cameron – and all of us – is that no-one seems to be taking any notice of such pronouncements, at least if the HPC findings are anything to go by.  Strong leadership is vital to good business, but so is the motivation and engagement of every single person at whatever level of seniority. This kind of pay inequality does nothing at all for that.

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