Pay differentials: Hanging in the balance
Pay for those at the top is on the rise again, while most workers continue to feel the squeeze of below-inflation wage increases – or freezes. Will the growing voices of protest prompt the government and employers to take action? Andy Allen finds out
Date:
09 December 2010
Source:
Guide to reward
Page:
15
The days when Peter Mandelson could say that the government was “intensely relaxed about people getting filthy rich” are long gone. Whether it’s bankers’ bonuses, top public-sector salaries or Wayne Rooney’s wage hike, pay inequality has come to dominate the headlines.
In October, RBS chairman Sir Philip Hampton admitted the bank was paying inflated salaries to staff who were not “worth it”, while Bank of England governor Mervyn King told delegates at the TUC conference in September: “You are entitled to be angry.” In November, Northern Rock boss Gary Hoffman turned down a £500,000 entitlement to cover six months’ gardening leave, after announcing he was moving to new banking venture NBNK. Union anger at the proposed payment when 2,500 Northern Rock employees had lost their jobs played a part in his decision, Hoffman said.
Something has clearly been going on in attitudes to pay differentials. But will public outrage result in more than the occasional grand gesture? Is the tide turning against the ever-widening gap between the best and poorest paid?
Until recently, reports on the subject have had mixed findings. But there is mounting evidence that the best-paid bosses and executives are once again making gains, while ordinary workers continue to feel the pinch.
Reward consultancy MM&K revealed in July that total reward for chief executives in the FTSE-100 had risen by 5 per cent between 2008 and 2009. Their report found that much of the increase could be accounted for by bonuses, even as share prices had fallen. A study by accountants Deloitte released in September found bonuses were bouncing back for executive directors at FTSE-100 companies, although base pay had stood still.
For the majority of workers, on the other hand, the picture has been less rosy. Pay awards typically remain below inflation, according to the latest Incomes Data Services (IDS) pay report. The survey of employer pay settlements revealed that 42 per cent of pay rises were within the 2-3 per cent band. Only 17 per cent of employers surveyed were offering above 3 per cent.
The government is sufficiently worried to be considering regulation. It started with two reviews on public-sector remuneration, soon after taking power (see panels below). But as Steve Tatton, editor of the IDS Executive Compensation Review observes, the public sector is not the key issue. He points out that Bart Becht, chief executive of Reckitt Benckiser was paid £93 million in 2009.
It is this kind of eye-catching figure that prompted business secretary Vince Cable to put executive pay at the heart of his new review into corporate governance in the private sector in October.
Cable has included an investigation into executive pay in the review, which is due to make recommendations in January 2011. Stating that the best solutions will come from business itself rather than regulation, he has called for input from company directors, shareholders and other investors.
Some observers may be cynical about directors’ willingness to rein in their own remuneration. Yet John Storey, professor of human resource management at the Open University (OU) Business School, says that he has worked with many senior executives who are embarrassed about their pay levels.
“They can only justify [their pay] on the basis that close colleagues and their perceived equivalents in other firms earn more or similar,” he says.
Nevertheless, Storey does not anticipate change. He says talk of free markets and even comparisons with famous footballers are used to justify the widening pay gap. Yet there is clearly a problem, he adds, since the acceleration in pay differentials in recent years has not been matched by an acceleration in performance.
He believes change within top businesses is unlikely because the remuneration committees which set pay levels tend to be unwilling to rock the boat – and are largely composed of people who enjoy similar high levels of reward in other companies.
But some pay experts disagree. Caroline Brown, senior manager in the reward team at KPMG says there is evidence of greater sensitivity to the wider corporate environment than there has been in the past.
“The quality of debate that goes on in meetings has improved enormously over the past few years,” she says , and the traditional process whereby remuneration committees would “meet once a year and inevitably ratchet pay up a notch” are gone.
Those who do agree big hikes run the risk of attracting the opprobrium of shareholders or the press – just look at the series of shareholder revolts that have occurred over the past two years at organisations including RBS, Tesco, Royal Dutch Shell and HSBC.
However, Tatton at IDS argues that the influence of such shareholder revolts has been overstated – and that they have been too weak and sporadic to make any overall difference.
Sean O’Hare, partner, human resource services at PwC, disagrees. He believes that the prospect of a shareholder rebellion is enough to make remuneration committees think more carefully about their decisions.
“What we’ve seen is that increases in base pay have been moderated and many companies have had a freeze in place for two years running,” he says. The question is whether they will maintain this strategy.
Meanwhile O’Hare points to other more subtle but significant changes in remuneration committee reports. Annual remuneration reports have gone from eight to 10 pages to 25 pages or more in length.
The majority are still essentially compliance documents which do not make it a priority to communicate with stakeholders, he says. But some remuneration committee chairs are realising that the remuneration report is one of the widest read parts of the annual report and is a good place to explain details of the goals and challenges facing the organisation.
“We’re starting to see some quite heartfelt letters from remuneration committee chairs at the beginning of the reports,” he says.
Whether this is a trend that will develop into something more significant may depend on how the economy fares in the short term. As Storey from the OU points out, it is only because of the financial crisis that the growing pay gap became an issue at all.
“Now it becomes sufficiently acute that there is the risk of social unrest,” he says.
Even such a threat may not be enough to force meaningful change, however. Indications are that, aside from the growing sophistication of remuneration committee meetings and a shift towards performance-related pay, it is business as usual.
Pay reviews in the public sector
The coalition government has appointed two Hutton reviews to examine remuneration in the public sector, one led by former New Labour cabinet minister John, the other by ex-Observer editor Will. The former is looking at public-sector pensions, the latter at limiting the highest paid public servants to earning no more than 20 times the level of the poorest paid in their respective organisations (see panel, below).
Meanwhile, communities secretary Eric Pickles has suggested that no public-sector worker should earn more than the prime minister’s £142,500.
Colin Miller, reward manager at Kent County Council, says of the PM comparison: “Could you actually think of a worse job to benchmark? This is a unique role with a unique benefits package.
“There are the staff, the houses, the fact that the role offers two salaries (of an MP and a prime minister), earnings opportunities when you leave the post, books, diaries and after-dinner speaking that you may be able to milk for years afterwards.”
Miller opposes formulae to limit public-sector pay. He believes they leave little room for subtlety and for fine-tuning the balance between base pay and any elements related to performance. Kent County Council moved away from national pay scales in 1990. It has also stopped incremental pay increases to ensure individual pay rises are dependent on performance, rather than automatic progression.
“We don’t want it to be a case of ‘just because you’re still here you go up a notch,’” says Miller.
Would a cap on pay multiples work?
Greek philosopher Plato believed the best-paid people in society should never earn more than five times the worst paid. Will Hutton’s review into pay differentials in the public sector (which published its interim findings last week) is looking at a rather more generous ratio of 20 to one – but it has still proved contentious.
To start with there is the question of definitions. How, for example, should the 20 multiple be applied to the increasingly complicated mix that makes up the modern remuneration package?
Will it, for example, apply to base pay alone, or base pay plus bonuses. Will it take into account pensions, and what about non-cash payments?
According to Duncan Brown, director at the Institute for Employment Studies and a member of the panel advising the Hutton Review, it would be simpler to measure top executives’ overall pay packages against the average pay package within the organisation. This, in turn, can easily be defined by dividing the company’s total annual remuneration costs by the number of employees.
There are more serious difficulties to overcome. Brown points out that one of the few organisations commonly held to have used ratios successfully – the John Lewis Partnership – had to abandon them when it went outside to recruit its chief executive.
Hutton is known to hope his findings will also influence the private sector, but pay experts question whether ratios could possibly be applicable to the wide variety of privately owned organisations.
How would you compare a supermarket chain, which has an overall low-paid workforce with a boutique consultancy firm consisting of a few partners plus support staff where the overall earnings level is high?
More worryingly, Brown has seen one estimate suggesting the 20 to one ratio would downgrade the pay of only around 12 public-sector bosses. The nightmare scenario is that it could actually lead to top pay inflation as bosses seek to have their salaries raised to the maximum permitted ratio.