Tag: executive pay

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Bosses gain – workers’ pain

Two reports released by Incomes Data Services tell dramatically contrasting stories about pay in the UK. One report focuses on average pay in the public and private sectors, which are both likely to fall in real terms in 2011. Most public-sector workers will see a freeze in their wages and, whilst private-sector workers’ pay could rise by an average of 3%, this will still be below the rate of inflation. The press release Pay awards may rise but will trail inflation (6/1/11) to the report stated that:

Private sector pay settlements in 2011 could well be higher than in 2010, as long as the economic recovery remains on track. But following the latest increase in VAT, they are likely to trail inflation, meaning that the cost of living may be set to rise faster than average pay settlements for the second year running.

However, the press release to an earlier report, FTSE-100 bosses see earnings rise 55% (29/10/10), stated that:

FTSE-100 directors saw their total earnings boosted by an average of 55% while across the FTSE 350 as a whole total board pay went up by an average 45%, according to the latest Directors Pay Report, published by Incomes Data Services. (Year to June 2010)

On the back of these increases FTSE 100 chief executives took home £4.9 million on average in total earnings during the year.

Meanwhile, there is continuing public outcry over the levels of bank pay and bonuses. Despite billions of pounds of public money having been poured into banks to prevent their collapse, bank bosses are set to receive huge remuneration packages worth several million pounds in some cases. And, despite being condemned by the government, it seems there is little it can do to curb them.

So what are the causes of the growing income divide between those at the top and everyone else? And what are the economic consequences? The following articles explore the issues.

Articles: IDS reports
Year of pain predicted for workers.. while bosses’ salaries continue to grow Daily Record, Magnus Gardham (7/1/11)
Another 12 months of pay freeze misery for workers… but bosses enjoy a huge 55% salary increase Daily Mail, Becky Barrow (6/1/11)
Private-sector pay set to trail behind inflation People Management, Michelle Stevens (6/1/11)
Private pay deals to lag behind inflation Financial Times, Brian Groom (6/1/11)
UK boardroom pay rises 55% in an age of austerity Guardian, Simon Goodley and Graeme Wearden (29/10/10)
Private sector pay ‘to trail inflation’ in 2011 BBC News (6/1/11)
Staff morale warning over bosses’ pay rises Independent, Jon Smith (6/1/11)
‘Dose of reality’ call over top pay BBC Today Programme, Robert Peston, Brendan Barber and Garry Wilson (6/1/11)
‘Severe squeeze’ on average pay BBC Today Programme, Ken Mulkearn (Editor of the Incomes Data Services pay review) (6/1/11)
UK inflation rate rises to 3.7% BBC News , Ian Pollock (18/1/11)

Articles: bankers’ bonuses
Bank bonuses ‘to run to billions in 2011’ BBC News, (7/1/11)
Cameron says banks ‘should pay smaller bonuses’ BBC News, (9/1/11)
David Cameron warns RBS over bonuses Guardian, (9/1/11)
Banks say ‘no’ to bonus backdown Management Today, Andrew Saunders (7/1/11)
Banks to pay out billions in bonuses BBC News blogs: Peston’s Picks, Robert Peston (6/1/11)
Why government can’t stop big bonus payments BBC News blogs: Peston’s Picks, Robert Peston (7/1/11)
Diamond: ‘I am compelled to pay big bonuses’ BBC News blogs: Peston’s Picks, Robert Peston (11/1/11)

Data
Average Weekly Earnings Incomes Data Services

Questions

  1. Why are average earnings likely to be less than the rate of inflation in 2011?
  2. Why were the directors of the FTSE 100 companies paid an average 55% pay increase for the year to October 2010?
  3. To what extent can marginal productivity theory explain the huge increases of bosses of top companies?
  4. If remuneration committees base executive pay increases on the average of the top 25% of increases of equivalent people in other companies (to stop ‘poaching’), what will be the implications for executive pay rises over time?
  5. What market failures are there in determining executive pay?
  6. What will be the implications for staff morale if their earnings are falling in real terms while their bosses are receiving huge pay increases? Should these implications be taken into account when deciding executive remuneration packages?
  7. Are shareholders in FTSE 100 companies likely to welcome the pay increases of their top executives? If so, why? If not, why not?
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The rich get even richer

With government cuts and pay freezes, many people are worried about their future. Against this background it’s little wonder that people are growing increasingly resentful about the soaring pay of bankers and other leaders of major companies – especially when they reflect on the behaviour of top bankers who were largely responsible for the recession in the West and the debt problems that resulted. And the gap between those at the top and workers on average pay just goes on widening. As the final article below states:

The boss who sells Cillit Bang got paid a hefty £92.6m last year, while his counterpart who builds executive homes pocketed £38.4m and a top miner took home £27m. These are not figures from some international football league, but the bosses of Britain’s biggest companies, who received an average 55% pay rise in the year to June. A top FTSE 100 boss now earns £4.9m – 88 times the average worker’s pay.

On 9 November 2010, a high pay commission was launched to investigate the yawning pay gap between top executives and those on average incomes.

As the high pay commission, set up by the thinktank Compass and backed by the Joseph Rowntree charitable trust, begins its year-long analysis into the widening gap between the lowest and highest paid, a Compass poll shows that 99% of people believe that top executives are overpaid.

The commision will seek answers to questions such as the following: Why has the gap widened so massively? What is the role of globalisation in the process? Why has competition not worked to compete top pay down? Why don’t company owners impose more restraint on executive pay? Is there a form of collusion to push executive pay ever higher? Are executives worth it?!

Articles

Let’s make CEOs justify their wages Guardian, Martin O’Neill (19/10/10)
FTSE 100 bosses criticised as boardroom pay leaps by 55% Guardian, Simon Goodley and Graeme Wearden (29/10/11)
Investigation launched into soaring executive pay Guardian, Jill Treanor (9/11/10)
Eighty-five per cent of people say top executives ‘should be paid less’ Telegraph, Ian Cowie (9/11/10)
Top executives paid ‘far too much’ Financial Times, Nicholas Timmins (9/11/10)
A mission to the outer limits of pay Financial Times, Andrew Hill and Esther Bintliff (9/11/10) (first part of article)
Sharing the spoils of business fairly Guardian, Deborah Hargreaves (13/11/10)

The High Pay Commission
The High Pay Commission, home page

Questions

  1. Desribe what has happened to executive pay of the top companies over recent years.
  2. How are executive pay packages determined?
  3. How relevant is marginal productivity theory in explaining executive pay?
  4. What are the incentive effects of having extremely high pay?
  5. What scope is there for collusion in determining executive pay?
  6. Why don’t company owners impose more restraint on executive pay?
  7. What are the social impacts of excessive executive pay?
  8. What could the government do to address the problem?