Would a High Pay Commission solve inequality?

Alarm bells for the City, as a pressure group demands a Government body to monitor executive pay.

Last Updated: 31 Aug 2010

The Government should set up a High Pay Commission to review pay levels in the upper echelons of UK plc, according to Compass, a left-wing pressure group. Its campaign, which is backed by the likes of Vince Cable and Jon Cruddas, argues for a new quango that will consider ways to cap executive pay – perhaps by introducing maximum wage ratios or higher bonus taxation. It’s clear that more needs to be done to narrow the gap between rich and poor. But we’re not convinced this is the right way of going about it…

Compass is launching its campaign after a weekend in which both Alistair Darling and George Osborne suggested they were willing to intervene to curb excessive bonus pay-outs (via new legislation if needs be, according to the former). Compass argues that ‘greed’ and ‘the unjust rewards of a few masters of the universe’ were largely to blame for the financial crisis. Now it wants the Government to create a High Pay Commission (to mirror the Low Pay Commission, set up by Labour in 1997 to advise on the minimum wage) and task it with carrying out a ‘wide-ranging review of pay at the top’. Its aim would be to come up with ‘concrete solutions… that will ensure a more sustainable, equal and secure economic future for all’.

Compass is on safe ground when talking specifically about bankers – clearly it’s true that performance pay cycles were too short, and rewards for failure too great, and no Government is going to lose popularity by putting the boot in. But it also lumps in Britain’s top corporate bosses, and here’s where the argument gets less convincing. For instance, it bemoans the fact that an employee on the minimum wage would have to work for 226 years to earn what a FTSE 100 CEO makes in one year – but is it really true that the bosses of Britain’s biggest public companies are horribly over-paid?

Like it or not, executive pay levels are not set in isolation – Britain has to compete for talent in a global market, and public companies have to compete with private ones. Hiking taxes (up to 90%, is one theory) or driving down salaries could make it harder for them to attract the best leaders – and then everyone loses out (it probably won’t even increase the tax take). As for implementing an arbitrary maximum wage ratio across the board, we have no idea how that would work (how do you set the figure? would it apply across the board? would it need new laws? what about foreign companies operating in the UK? etc)

So although the aim of reducing the wealth gap is a laudable one, this smacks slightly of a rich-soaking exercise. Still, the fact that we're even having the argument shows that there's now a strong groundswell of public support for measures to curb executive pay. Businesses need to get their thinking caps on: if they don't try and solve this problem proactively, they run the risk of ham-fisted Government legislation trying to do it for them.

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