49 minutes to earn a year’s worth of the Living Wage
Guest blog on new TUC report
For Living Wage week 2014 Janet Williamson, Senior Policy Officer at the TUC, introduces a new report on unequal wages in the UK.
A new TUC report Executive Excess has found that it took Britain’s highest paid director just 49 minutes to earn what a Living Wage worker would earn in a year.
Simon Peckham, Chief Executive of investment company Melrose, received total annual earnings of over £31m or £119,836 a day. This is 2,238 times more than a worker on the non-London Living Wage of £7.65 an hour who worked 35 hours a week.
Across the FTSE 100, the average (median) total earnings for the highest paid director was over £3 million – 230 times an annual full-time non-London Living Wage. It would have taken just over a day for the average director to have earned a year’s worth of the living wage.
It is this inequality that has fuelled the TUC’s Britain Needs a Pay Rise campaign, which brought nearly 100,000 people marching on the streets of London on 18th October.
Executive Excess sets out the total remuneration and basic pay of the highest paid director at FTSE 350 companies in the year ending April 2013. As well as comparing directors’ pay with the Living Wage, the report sets out information on average employee pay at the same companies. It finds a vast spectrum of pay ratios between top directors and average employee pay at their own companies – from 1,607:1 at the top end to 3:1 at the bottom. Across the FTSE 100, the average (median) ratio of top directors’ total earnings to average earnings of their own employees was 85:1.
However, the figures for staff earnings are only approximate, because company reporting on employee pay is so poor that it is currently not possible to calculate robust figures for average employee earnings from companies’ annual reports. At present companies are only required to publish a figure for the total cost of staff remuneration and the number of staff they employ.
These totals allow calculation of a crude figure for average (mean) pay, but further analysis is difficult because different companies compile the data in different ways. For example, some include overseas staff based in countries where pay might be higher or lower than the UK. Some companies include contractors and some do not. And no account is taken as to whether workers are employed full or part time. For more on this and the TUC's attempts to obtain accurate information on employee pay directly from the companies covered in the report, see my blog on Touchstone or the report itself.
However, remuneration committees – that set directors’ pay – have been required for many years to take into account pay and conditions elsewhere in the company when setting directors’ pay and to report on how they have done this. Unfortunately, they have either ignored or at best played lip service to these requirements, and the gap between executive pay and the pay of ordinary company employees has continued to grow.
Bad for business
This approach is not good for business. As the report argues, such large pay gaps within companies overvalue the contribution of those at the top in relation to other company workers, which can damage employee morale and motivation. It can also make it harder to achieve pay settlements with staff, who will understandably feel aggrieved when pay restraint for ordinary company workers goes hand in hand with pay rises for company directors. Research clearly shows that companies with high internal pay differentials do worse on range of performance measures, from productivity and product quality to overall firm performance.
At the same time, high pay gaps within companies contribute to inequality across the economy as a whole. The damage to social cohesion caused by inequality has long been recognised; but there is also increasing acceptance that inequality causes serious economic problems too. The lack of real earnings power of those at the bottom compared with those at the top contributes to housing bubbles, unsustainable levels of personal debt and acts as a barrier to recovery in times of recession. The social effects of inequality hardly need spelling out: we are in danger of creating a two-tier society, where the divisions created by vast differences in income are so great as to threaten the bonds that hold us together.
Better worker representation
The report calls for a range of measures to tackle excessive executive pay, including worker representation on the remuneration committees that set directors’ pay. It also calls for mandatory standardised disclosure of employee earnings in company reports so that workers, unions, shareholders and the public can judge for themselves whether the remuneration committees are living up to their obligations to take employee pay into account when setting directors’ pay.
Tackling inequality requires action at both ends of the pay scale – raising the wages of the lowest paid and curbing excessive pay at the top. Introducing a sense of fairness into company pay setting processes so that the fruits of company success are shared by all company workers is an essential part of creating a fairer and more sustainable economy.
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