Anthony Hilton: Time to link chiefs’ bloated pay to productivity not profit

If Jeremy Corbyn gets in to Downing Street there might be something done about executive pay. A huge tax on the amount bosses earn might break the cycle of excess, albeit with unintended consequences. Nothing else seems likely to.

Some business executives privately think things have gone too far — for other people though, less for themselves. They do not, however, make waves publicly, being instead like Trappist monks. Therefore it is down to the politicians to put some sense into the debate. Pity it has to be Corbyn, but the Conservatives have watched without doing anything for years.

Pay is now at egregious levels. In 1998 in the UK, the chief executive earned 48 times the amount earned by the average person, and that was itself roughly double what they earned 10 years before. In 2016, however, it had risen to 129 times average earnings and is showing no sign of slowing down. Only in America is pay even more absurd.

In the Eighties chief executives were still constrained by the previous reality of 83% tax in the Seventies. This was reduced to 60% by Margaret Thatcher at the beginning of the decade, and then 40% by Nigel Lawson while chancellor in 1987. Salaries did not go up much in those days, After the tax cuts, the executives thought they were well off anyway. But gradually they started asking for more and to their astonishment they pushed at an open door. There was virtually nothing to stop them, other than peer pressure from other executives who were earning less in other companies — though that did not last long. Remuneration committees and consultants were put in to calm things down, but that only made things worse.

Deborah Hargreaves, formerly of the High Pay Centre, saw these things at first hand and has written a book — Are Chief Executives Overpaid?

This week the Centre for the Study of Financial Innovation, a think-tank, promoted a discussion of her book. The assortment of City bigwigs making up the audience might have been thought to be sceptical. But by and large they were not.

One said that, in his experience, most executives were mediocre, some were scarily bad, and throwing money at them just made them worse. Another said that there seemed to be no sense of morality among executives; a third that, even if executives were well paid, there should be some way to stop rewards for failure, with unlimited liability for chief executives an option. And finally, there was the effect on culture; the chief executive wanted his bonus and sometimes the whole culture of the company was distorted to achieve it. Banks were a case in point.

But they were equally sceptical about stewardship with shareholders taking a stand. Few institutions actively engaged; many did not have a high number of shares as they invest overseas as well; and foreign institutions over here mostly did not get involved. Besides which, fund managers were fat cats themselves, earning pretty much the same as executives.

So the trouble with Hargreaves’ book is that, though it articulates the problem, its solutions are not likely to come to much. She does, for example, hold out hope of greater stakeholder governance but it is unlikely to happen any time soon. Basically she pleads for sanity, which may be a lost cause.

But there is an alternative. Andrew Smithers, a city economist for longer than most and still thriving at 80, said in his 2013 book Road to Recovery that excessive executive pay damaged productivity. Moreover, he had the figures to prove it.

If companies invest, productivity tends to follow. It is the key to growth. Lack of it means that wages stagnate, companies do not flourish, the tax take dwindles and public services are cut. But companies don’t invest because executives are focused on the short term and instead they put up selling prices to reap short-term profits. Investment is long term and therefore not for them.

Smithers has been trying to get government to see this as a problem, or at least talk about the issue, but to no avail, even though government is desperate to get productivity up. He did, however, notice September’s IPPR report Economic Justice, which the Archbishop of Canterbury co-authored, arguing that pay should be linked to productivity rather than profit.

With this he is totally in agreement. If executives had to concentrate on productivity and actually made the company better, there might be no need for Corbyn.