Today's CEO earns 130 times the average salary. We need to talk about this

by Stefan Stern, Director, High Pay Centre 16 views0

Lessons from the richest man who ever lived

This article is part of the World Economic Forum Annual Meeting 2017. It first appeared on WEF’s website https://www.weforum.org/agenda/2017/01/ceo-earns-130-times-average-salary/ and is republished with its permission.

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Now hear this: this is your President-elect speaking. “It’s disgraceful…you see these guys [CEOs] making enormous amounts of money. It’s a total and complete joke,” Donald Trump told CBS News in September 2015. The future President ran successfully, in part by denouncing the status quo in big business, decrying inequality, and promising a better America with jobs for all, an America that would be great again.

And during the UK’s June 2016 referendum on EU membership, the Leave campaign also attacked so-called “fat cats” and those corporate interests who argued for staying inside the EU. Bankers and business leaders were portrayed as the enemy, extracting excessive rewards for their work while ordinary people suffered. The Leave campaign made their appeal sound like a bid for greater economic justice.

We will find out in the coming months and years whether these appeals to voters were more than campaign rhetoric. But we should be in no doubt: business is vulnerable to the charge that the gap in pay between those at the top and the rest has grown too large. This attack has potency. It can shift voter sentiment and determine the results of important elections.

A recent study from the ILO, the Global Wage Report, found that the top 10% of highest paid workers in Europe together earn almost as much as the bottom 50%. “The payment of extremely high wages by a few enterprises to a few individuals leads to a ‘pyramid’ of highly unequally distributed wages,” the report said. Figures from the FTSE100 index of companies reveal a similar story. Whereas 20 years ago the average CEO was getting around 45 times the pay of the average worker in the business, today that ratio is around 130 times.

Ranked Wages

The Global Wage Report 2016
Image: International Labour Organization

That might be reason enough for the remuneration committees of big corporations to reflect on how effectively they are working to restrain excess at the top. But it is not just the cry of populists which should concern them. Prof Michael Sandel of Harvard University warns against what he calls “meritocratic hubris” which, he says, is “morally corrosive”. “The belief that the system rewards talent and hard work encourages the winners to regard their success as their own doing, a measure of their virtue – and to look down on the less fortunate,” he wrote in The Observer in December. To the losers in this system, the so-called meritocracy looks more like “a ladder whose rungs are growing further and further apart”.

It is sometimes argued that huge pay at the top is inevitable. Globalisation, competition and technological change have made leadership roles far more important. There is a “war for talent”, and only a few exceptional people are capable of becoming a CEO. There is great demand and limited supply. Of course pay has shot up.

It’s always been tough at the top

But these arguments are largely self-serving, and do not survive much scrutiny. Business has always been international, and there has always been technological change. It has never been easy to be a CEO. The history of the 20th century, with two world wars, hyperinflation, financial crises, the Cold War and the oil price shock, was hardy a period of benign stability.

The size of a corporation alone does not justify a massive CEO pay package. As Sir Philip Hampton, former chairman of Sainsburys and RBS and now chair at GlaxoSmithKline, has pointed out, arguably the bigger a corporation is the less credit should go to the boss. There is a vast array of senior executives and corporate infrastructure in place to support the business. In any case, good corporate governance requires all significant decisions to be taken by a team of people and not by an individual CEO on his or her own. Why in this case should a CEO receive such a disproportionate share of the rewards on offer?

The mandatory publication of the pay ratio between the top and the median worker in the business will help shine some light on pay gaps. Under the Dodd-Frank legislation in the US pay ratios are finally coming, to be followed perhaps in the UK once a current consultation process is concluded. This greater transparency will help apply some pressure on boards to exercise restraint.

The decline of trade unions seems also to have coincided with the steeper rises in executive pay at the top. Reintroducing the voice of employees, via elected representatives, in remuneration committees might also help “ground” the conversation in reality. And of course shareholders could do more to urge restraint. Many have been too passive for too long.

The limits of legislation

But ultimately legislation can only do so much. Out-of-control pay at the top is a systemic, cultural problem. It requires all participants to change their behaviour. And those changes will be more effective and long-lasting if people choose to act differently, rather than being forced to do so.

The gap could be closed by increasing pay lower down the income scale. But the ILO’s wages report reveals that there are no easy or painless solutions to closing the inequality gap. As the report’s author, Patrick Belser, told The Guardian: “In Europe, inequality within enterprises accounts for almost half of wage inequality,” he said. “That tells you just having minimum wages is not going to solve wage inequality.”

“Responsive and responsible leadership,” the theme of Davos 2017, must mean taking effective action on damaging income (and wealth) inequality. This will require fresh thinking, but also, perhaps, taking another look at some older ideas that have gone out of fashion in the past 30 years.

According to Ryan Avent, a writer for The Economist and author of The Wealth of Humans: Work and its Absence in the Twenty-First Century, “In a world in which technology makes employment more precarious and less remunerative for many workers, redistribution will need to become much more generous and ubiquitous.”

As President-elect Trump enters the White House, and the UK government prepares to start its negotiations to leave the EU, CEOs need to reflect on what they can do not only to help their businesses succeed, but to strengthen the societies in which they operate.

The writer is director of the High Pay Centre, a London-based think-tank.