Kristy Dorsey: CEOs paying 63 times more than salaries means it’s time to face reality

0

The financial outlook for most people in the UK has never been bleaker, with consumer confidence now weaker than in the darkest days following the collapse of the global banking sector. Already hampered by a decade of austerity and the fallout from Brexit, Britain’s economy is now caught in a maelstrom of dire straits as record inflation hampers the post-Covid recovery.

Living standards are set to fall at the fastest annual rate since the mid-1950s, according to estimates earlier this year from the Office for Budget Responsibility, and it will take until at least 2024 to return to pre-Covid levels. Squeezing household incomes led the tax and spending watchdog to cut its growth forecast for this year to 3.8%, down from a previous estimate of 6%.

All of this is happening at the same time as the scale of income inequality in the UK is widening. A report released yesterday by the High Pay Center – an independent think tank focused on improving the lives of people on low to middle incomes – shows that the pay of UK business leaders is on track to exceed median earnings of employees more than before the pandemic.

The disparity rate fell sharply at the start of Covid as strict lockdown measures shut down large parts of the economy and reduced profit-related bonuses which make up a large proportion of business leaders’ pay. Looking at the 350 largest companies listed on the London Stock Exchange, the High Pay Center found that the ratio had fallen to 44:1 in the 12 months to December 31, from 53:1 the previous year.

However, looking at the 69 companies that reported in the first quarter of 2022, this trend appears to be reversing. From an average of 34:1 a year earlier, the ratio of executive compensation to that of median-wage workers at these companies has risen to 63:1.

READ MORE: Chancellor must be ‘smart’ to help UK through cost of living crisis

The UK has become a deeply unequal society over the past few decades, with the typical salary for CEOs having risen from around 10 to 20 times that of the average worker in the early 1980s to a staggering 119:1 for a chief executive in the FTSE 100 in 2019. Strict followers of market forces ideology argue that this is an essential feature of the capitalist system because the most money goes to those who work harder, smarter and more productively than everyone else.

Is the person at the top really 40, 80, or 100 times more valuable to their organization than those handling day-to-day business? Many companies obviously believe this. The pandemic and ensuing labor shortages have supposedly laid bare the importance of frontline staff, but corporate culture still comes down to type.

Regardless of one’s view on this specific issue, there is growing evidence that to maximize income and wealth for all – both the better-off and those who have less – there must be meaningful controls. on wealth and income inequality.

At this point, it is important to emphasize that not all inequalities are bad. A 2015 study by the World Bank found that a certain amount increased GDP in developing economies by allowing wealthy entrepreneurs to invest more. Similarly, a 2017 study by the International Monetary Fund found that, at moderate levels, inequality can benefit growth in mature economies.

The latter was based on a scale of 0 to 100 known as the Gini coefficient, where zero means everyone has the same income and 100 means one person has everything. In countries with an index below 27, inequality has boosted growth.

READ MORE: Consumer confidence plunges to record low on GfK measure, but April retail sales surprise

Unfortunately, the most recent value of the UK’s Gini index is 34.4, well above the threshold where inequality becomes harmful. Its economic toll begins with undermining educational opportunities for children from disadvantaged backgrounds, making them less productive employees, and extends from there to eroding health and well-being, increasing crime and falling per capita income.

The High Pay Center has put forward a number of proposals to promote a fairer distribution of income, which its research shows is favored by the majority of the population. These include, among others, legislation requiring worker representation at board level, the introduction of mandatory profit-sharing for all employees and measures to give shareholders a binding vote on director compensation reports.

Such notions are widely dismissed in the business world as far too radical but, after decades dominated by financial crises, a global health catastrophe and now the most challenging inflationary environment in nearly half a century, it is time to be much more courageous and think about building a more egalitarian compensation model.

“Neither wage stagnation nor a cost-of-living crisis is inevitable,” the High Pay Center said. “Both are the result of political choices.”

The question is where might the impetus for any change in direction come from? Chancellor Rishi Sunak’s unfortunate spring declaration, which is expected to send hundreds of thousands more people into poverty, was decidedly unimaginative.

Touted as the “biggest personal tax cut in 25 years,” various relief measures announced in April only come into effect at various stages further down the road. The only immediate help offered was a paltry £200 loan to be spent on rising energy bills, which will have to be repaid.

Soaring poverty and inequality will cripple the economy and is therefore bad for everyone, whether it’s the top 1% or the bottom 99%. Business owners, whether billionaires or small retail investors, need a population that can afford what they’re selling. In what promises to be an unsolvable downward financial spiral, new thinking is hopelessly overdue.

Share.

Comments are closed.