Pay Cuts For All! Except Your Boss

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Your wages are falling while your bosses rise. This is what the statistics from the Annual Survey of Hours and Earning from the Office for National Statistics show this week. It is well known that this indicator of inequality leads to social unrest and upheaval, but steps to tackle the problem are not being acted upon.

The data shows that the annual salary of a full time worker rose 1.4% to £26,244, but in real terms, with inflation running at 5% this is actually a decrease in wages of 3.6%. And with the prices of energy, food and the VAT rise the effects are compounded

People working in “elementary occupations” with little skilled work had their pay drop by 0.9% a real drop of 5.9%. Senior managers pay rose by 7.1% to £77,679, a real increase of 2.1%. Directors and CEO’s of larger organisations enjoyed a rise of 15% to earn £112,157, a real rise of 10%. Those “fortunate” enough to be working for FTSE 100 companies saw their pay in real terms rise by a stratospheric 44%.

This is in line with the general trends for pay over the last 30 years, in the UK between 1999 and 2009 the wages of the poorest 10% of the population fell by 12% while the richest 10% of the population earned 37% more, far outstripping productivity.

The High Pay Commission also highlighted the wage inequality present in this country this week. It revealed that the CEO of Barclays wage has increased nearly 5000% in the last 30 years. He now earns more than 169 times as much as an average worker compared to 13 times as much in 1980. The Church Investors Group found that in Tescos the owner earns £6.25 million, 526 times as much as the average wage of the people working for his company.

There are many trends at work behind this process of increased profits to the rich. Partly it is because of the the idea that the “wealth creators” need to earn enough money for the “trickle-down effect” to kick in, where they can spend their money setting up new businesses and creating jobs for the rest of us. In a world where economics is driven by rational self interest the CEOs must be the most rational and thus the most rewarded.

Others that may be to blame are the chummy remuneration committees made up of executives and non-executives. It is within their interests to give their bosses more pay as theirs are more likely to rise in response. There is also a culture of one-upmanship between companies as they try and give their managers the highest wages. The idea is to prevent their CEOs being poached by other global companies but in reality there is little evidence for this. American companies are especially dangerous as historically the shareholders in the companies don’t have much power over remuneration so American CEOs have much higher pay.

Shareholders in general are blamed for not responding to excessive pay packages. This is generally thought to be because of the decrease of UK based and long term investors that know the company better and are more likely to challenge bad practice. In 1980 3.6% of shares of publicly traded UK companies were held by offshore investors, that compares to 41.5% now. Similarly long term investors from insurance companies and pension funds have dropped from 50% to 25% from 1990 to 2008.

The news that boardroom pay is skyrocketing is especially concerning considering the actual talent exhibited by many CEOs. Psychologist Daniel Kahneman, winner of a Nobel Prize for economics studied the performance of traders and fund managers over 8 years of their careers. Instead of seeing the best rising to the top, he saw a random distribution of success and failure. The individuals simply got lucky rather than consistently earning their way up the company through hard work and then apportioned themselves huge bonuses because they thought they were naturally gifted.

Another study by the journal of Psychology, Crime and Law tested 39 managers and CEOs on their behavioral tendencies like aggressiveness, dominance, extroversion, superficial charm, manipulation, narcissism and grandiosity. The study found that the CEOs and managers scored very highly on these factors, in fact they scored equally or higher than those incarcerated in Broadmoor special hospital convicted of violent crime. George Monbiot said in his column “it seems to me that if you have psychopathic tendencies and are born to a poor family, you're likely to go to prison. If you have psychopathic tendencies and are born to a rich family, you're likely to go to business school.”

In my view everyone working 9 to 5 is putting in relatively the same amount of effort into their work, for people to earn hundreds of times more simply because they’re handling more cash seems unreasonable. The CEO of Shell said “You have to realise: if I had been paid 50% more, I would not have done it better. If I had been paid 50% less, then I would not have done it worse.” Simple reforms could improve the lot of millions of people in this country. Suggestions have been to strictly limit the ratio of average pay to CEO pay, variously to between 1:20-70, this isn’t unachieveable, British Airways has a ratio of only 1:15. Less drastic proposals could include greater transparency in executive and boardroom pay, including employees on remuneration committees or setting up a national regulatory body for high pay.

High executive pay damages the whole country, just as people have lost faith in politics they have lost faith in business leaders. When the world seems unfair it makes people angry, they riot, they occupy and they strike. It seems to many that the only way to bring out any significant change is to hold the country to ransom. David Cameron may criticise the wave of unrest sweeping across the country, but it hasn’t come from nowhere, it’s been building up for decades and he’s failing to do anything about it.

And a little extra reading:

Average salaries fall while corporate bosses see their pay rocket - Charlie Cooper for The Independent

The Self Attribution Fallacy - George Monbiot

It is time to mind the pay gap (again) - Heather Stewart for The Guardian

Photo flickr user Pete Edgeler.

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