Time for Cable to plug the gap on pay ratios

Duncan Exley is the campaign director for One Society

Among the subjects Vince Cable is likely to be considering as he prepares for the Liberal Democrat conference is that of executive pay. The business secretary has repeatedly attacked excessive remuneration, and today One Society releases a report (pdf) which examines the scale and consequences of the gap between high and low pay.

In July the FT reported (£) that Cable had doubts about Will Hutton’s recommendation that companies be required to report top-to-median pay ratios, because pay differentials often reflect workforce structure more than the fairness of pay practices.

Today’s report should assuage these doubts, and show why and how pay gaps can be addressed in a way that combines improved economic performance with broad public support.

Firstly, reporting ratios would not just produce an easily-understood metric of rising executive pay.

In some companies, high executive pay and low employee pay are connected, because executives can be tempted to meet targets by suppressing wages to a level which increases short-term profits at the expense of longer-term revenue.

Mandatory reporting would help counteract this temptation. Our report also contains evidence high ratios have adverse effects on employee performance and mental health, as well as undesirable consequences for society.

Secondly, although comparing pay ratios in a company like BAE Systems, most of whose staff have specialist technical skills, with one like Tesco is not comparing like with like, widespread pay reporting would allow us to compare comparable companies (Tesco and Sainsbury’s, say) and identify any with unusually high ratios that are not explained by structure or performance (investment advisors PIRC recently made a similar point).

And nor should the business secretary worry that greater disclosure will just allow executives to see who is paid more than them and aspire to ‘catch up’ (as has happened when pay disclosure improved in the past). Executive pay levels are already well-known to other executives, and reporting pay in relation to other people’s pay may help to remind us all that we exist in relation to others.

Another thing Dr Cable should remember is there are two sides to a ratio. Undeserved executive pay is a problem, but so is undeservedly low pay, especially when the taxpayer picks up the bill for supplementary benefits and the economy struggles to recover because too many people have too little money to spend.

This is why he should explore ways of encouraging companies to report their policies on rewarding their lowest-paid staff (and on-site contractors, to reduce the temptation for executives to massage the ratios by outsourcing low-paid staff).

The business secretary has made the point that:

“…transparency only gets us so far.”

He is absolutely right; transparency is necessary but not sufficient. Part of the reason executive pay has risen so far is that executive pay decisions are made by an elite of very highly paid people deciding on the pay of other very highly paid people.

Unless the membership (and agenda) of remuneration committees includes people to whom £4.5 million pay deals do not seem normal, there will be insufficient pressure to ensure remarkable pay is only awarded for remarkable performance.

Taking action would also be an opportunity for the Secretary of State to win support from the 64% of adults who want the government to reduce pay gaps in both public and private sectors. The rage expressed against excessive pay gaps, from the Mail and Sun to the Guardian and Independent, means decisive action could help to improve the standing of Dr Cable, as well as the performance of UK plc.