My old friend Heather McGregor was on Radio 4’s Today programme earlier this week. The subject was executive pay and the way in which it appears to have spiralled out of control. According to the High Pay Commission, the value of the average pay package given to executives has risen by a startling 5,000% in the last 30 years. Over the same period the average worker’s salary has risen by a mere 300% (to around £25,900). The head of HR at Cadbury’s made £3.8m in 2008.
Heather pronounced herself not much bothered by this. Executive pay is, she suggested, not a matter of what people perceive or do not perceive as fair. Nor is it of any relevance to the rest of us. It is simply a matter for the companies’ shareholders: they decide how much their executives get paid and that is that. She rounded her comments off by noting that anyone who thought that workers’ co-operatives would work better than our system should “move to Cuba”.
None of this went down particularly well. Probably for good reason. Heather is right in theory. Shareholders should control pay. They should do it because every penny paid out in salaries and incomprehensibly calculated bonuses is a penny not paid to them in dividends. They should do it because a sustainable long-term business needs happy customers and employees as well as happy executives. And they should do it because if they don’t, in the end, someone else will.
But, while that’s the theory, in practice the UK’s big shareholders aren’t doing it. You can blame this on the fact that they mostly grossly overpay fund managers who have no intention of rocking the gravy-filled boats they share with top executives by delivering and acting on the views of the ordinary investors they are supposed to represent. You could blame it on the nonsensical talent myth (top executives are special). Or you could blame it on the regulations surrounding remuneration committees. Whatever. The fact remains that shareholders aren’t behaving as proper capitalists, with an eye to a sustainable long term, are supposed to.
This matters. Until this crisis began, the huge rise in income inequality, and rise in corporate profits at the expense of wages in the West, was cleverly covered up by government and the central bank’s low-interest-rate policies. As long as house prices were rising, everyone felt like they were getting rich along with the bankers and the CEOs. Now that house prices aren’t rising they know for sure they won’t. That means, as Albert Edwards puts it, that from now on “labour will fight back to take its proper (normal) share of the national cake”. That means sharp rises in social unrest, squeezed profits and probably rising corporate taxation too. I wonder if, when all this kicks off, our fund managers, executives and bankers might not wish they had figured out what is fair and what is not a little earlier.