12 Oct

Are Chief Executives Overpaid?

Posted By Politybooks

By Deborah Hargreaves

Ten years on from the banking crisis that nearly broke the western economy, we could finally be approaching a new capitalist ethos.

When you have Goldman Sachs’ former chief economist writing in the Guardian that businesses need to rediscover purpose, as well as profit, a change of mood is in the air. And Jim O’Neill who is also a former Tory minister, says Labour has caught the Zeitgeist.

In the US, presidential hopeful Elizabeth Warren, has introduced an accountable capitalism act to the US senate. This would move big US corporations away from maximising profits for shareholders and give more power to the workforce.

The responsible capitalism backlash against corporate greed and excess is long overdue and is still in its infancy. But Britain’s Labour party has some innovative ideas on improving the way business works.

Still, there is a long way to go. Executives running companies as cash machines for investors, have fed growing public distrust with the sector. This has been exacerbated by flatlining wages for the majority while those at the top of the income scale have been pocketing millions.

With trust in freefall, a sceptical public is suspicious of company leaders’ motives. It means that warnings from the business community over Brexit were dismissed as “project fear.”

In my view, there is a direct line to be drawn from the way our companies hold down pay for the majority and push it sky-high for those at the top, to the growth of populism, the Brexit vote and the election of Donald Trump.

These were the themes I set out to explore in my book “Are Chief Executives Overpaid?”

The pattern of the past 25 years has seen executive remuneration quadruple while workforce wages have barely kept up with inflation.

FTSE 100 chief executive remuneration increased on average by 23% to £5.66m last year (2017) according to figures by the High Pay Centre and CIPD – there were a couple of large awards that skewed this. But even the median figure rose by 11%.

This is against the background of the growth in the so-called gig economy for a large part of the workforce where zero hours contracts and self-employment have taken over from guaranteed work.

We have created deep divisions in society between those often struggling to make ends meet and their bosses who are being paid untold riches.

We should stop giving executives short-term, share price driven incentives. Performance-related pay which has become the mantra of the corporate world, can produce the wrong sort of behaviour.

We are told that directors need to be incentivised to run the company better and for that, they need shares to have the same impetus as investors.

This does not work well over the longer term. Share price gains can be ephemeral and hard to dissociate from the overall economic climate. It can encourage a share price fixation in executives who should be building companies for the long-term.

I am encouraged by the growing arguments for a new corporate ethos. I believe we are paying our executives to do the wrong things. Shareholders should not be the only beneficiaries of company success and the proceeds of that wealth should be shared more widely.

In the UK, we already have a Companies Act that defines the way a firm should be run. The list of beneficiaries is much longer than just the shareholders and includes employees and customers. Directors need to embrace that outlook and set up structures to achieve it.

Elizabeth Warren says the US also needs to move in that direction. She wants the workforce to elect 40% of directors.

We need to look at the inclusion of staff on the board – a move favoured by Theresa May before she lost her parliamentary majority. We need to break open the small clique of mainly male directors who are in charge of companies and introduce more diversity.

We can also change the way we pay our business leaders to move away from shares and stick to cash. This would strip the executive pay package back to its basics.

My book is a call to action for those who value capitalism and free markets. If they aren’t seen to be fair, anti-business sentiment will intensify and we could see the very fabric of our economy undermined.

Deborah Hargreaves is former business editor of The Guardian and a founder and director of the High Pay Centre, an independent think-tank that monitors executive pay. Her new book Are Chief Executives Overpaid? is now available from Polity.