The Case For Curbing Executive Pay

It is important that people feel there is some sense of fairness in the division of rewards throughout the economy or disillusionment sets in.

Even freemarketeers can buy in to the idea of pay reform, as greedy executives can be said to be wrecking capitalism for the rest of us.

Capitalism as a system has been remarkably successful in improving the lot of a huge number of people, but if a small group of those at the top undermine it by taking more than their fair share, we could face a backlash against free markets.

Stagnating average wages and increasingly insecure employment terms, accompanied by runaway pay at the top, had a role to play in the Brexit vote and the election of Donald Trump in the US. Many people express concerns about the growth of a two-tier economy and society, with the elite enriching themselves at the expense of everyone else.

Commentators such as Martin Wolf in the Financial Times argue that the liberal international order that has presided since the Cold War, is crumbling.1 This is in part because it does not satisfy large parts of western society – the people who voted for Mr Trump and Brexit.

As people watch a tiny elite consuming far too much of everything, it undermines their trust in government, business and the country itself. British people therefore ignored warnings about the risks of Brexit and voted Leave in 2016.

In one memorable exchange before the Brexit vote, a journalist quoted a woman in the north-east heckling a visiting professor who encouraged his audience to imagine the plunge in GDP if Britain left the EU.

‘That’s your bloody GDP, not ours’, the woman said.2 The woman was right in that the enrichment of those at the top has failed to spread beyond that small group in the way that was envisaged in the 1980s.

The trickle-down theory of economics assumed that boosting rewards for people at the top of the income chain would stimulate economic growth as they employed more people and spent their increased income on goods and services.

However, the theory has been thoroughly debunked in recent years and disowned by the very institutions that promoted it in the first place, who now say that it has created greater inequality.

A rise in the income share of the wealthiest people actually leads to a fall in growth and, by contrast, a boost to incomes at the bottom increases GDP over the medium term.

However, in the past thirty years, the opposite has happened, exacerbating inequality within countries and threatening to unravel the social contract.

The absence of trickle down, the growing feeling that business leaders are in it for themselves and the damage to the economy from short-term management incentives, would all indicate that change is required in the way we pay our top bosses.

The deep influence of the business sector has imposed globalisation and trade liberalisation on a populace that finds it hard to discern the benefits. At the same time, they see the corporate elite hand in glove with governments around the world to ensure there is little challenge to the current set-up.

This reinforces the impression among the public that the system is rigged and the powerful are not just greedy but corrupt as well.

These feelings endanger the corporate sector’s license to operate, as public faith in business and even capitalism itself is eroded, and support begins to grow for all sorts of anti-business initiatives.

Donald Trump has already moved to impose protectionist tariffs on steel imports, threatening to plunge the world into a new, damaging trade war.

A critique of the self-serving justifications for excessive pay is often attacked for relying on the wrong data, a misunderstanding of the way companies work, and plain old envy.

But if capitalism is not seen to be fair by much of the public, there will be moves for something more drastic to replace it. It is time for the business sector to listen to the moderate voices for reform or reap the consequences of growing inequality, anti-business sentiment and possibly more dramatic clashes.

If we don’t rise to the challenge, the fundamental trust that makes a liberal market democracy function could be damaged beyond repair. We run the risk of sleepwalking into a dystopian future of extreme income disparities and the unrest that could bring.

Deborah Hargreaves is former business editor of The Guardian and director of the High Pay Centre.

In her just published book “Are Chief Executives Overpaid?”  Deborah Hargreaves makes the case for chief executives’ pay packages to be stripped back to basics, removing the performance shares and paying in cash.

If shareholders want the executives to own shares in the company, they can buy them with their own money rather than have them gifted. The present system discourages investment, as it takes too long to pay off, and is a contributing factor to the poor productivity growth in the western world.