The Opinions of Experts

“We want what you have.” Threatening letters arrive on the door mats of the wealthy residents of a south London street in John Lanchester’s best-selling novel, Capital, which amusingly charts the rise in wealth and inequality evident in the U.K. capital city since recently deceased Mrs. Thatcher’s reforms let the financial markets rip. The footballers, bankers and executives living in Pepys Road are representative of some of those employment categories that have benefitted most from the huge growth in inequality in the United Kingdom.

The share of national income going to the top 1% of the income distribution in the United Kingdom has, as in the United States, more than doubled since 1979 to 14.5% from 6%. Large-quoted company FTSE 100 chief executive pay has increased from 50 to 150 times average earnings in the past decade alone. Even the Institute of Directors, a powerful business group, which in May hosted the excellent joint High Pay Commission and Resolution Foundation Big Pay Debate, “has noted with growing concern the rapid rise in executive remuneration” (Director, Simon Walker, a speaker), which according to U.K. Business Department Secretary Vince Cable, another speaker, “has not reflected company performance.”

Now if like me, (and the International Monetary Fund), you believe that the trend of rising inequality is a serious issue for governments and employers to address, given the damaging social and economic consequences that can result (so well documented in Richard Wilkinson and Kate Picket’s influential book, The Spirit Level), then is seems to me that there are three broad ways in which this can be achieved.

First, you can attempt to cap pay at the top. Although the government-commissioned Will Hutton’s Fair Pay and Vince Cable department’s executive pay reviews have rejected absolute earnings caps, the pressures to restrain top pay have increased markedly in the past 12 months. The Business Secretary expressed his personal preference in his talk for “being more radical in taxing wealth,” despite this month’s 5% reduction in the United Kingdom’s top income tax rate.

The impending Business Department reforms will introduce a binding shareholder vote on executive remuneration, as well as attempt to improve the transparency in the reporting of executive pay levels. Other countries such as Switzerland have gone further and the European Union’s forthcoming CRD (Capital Requirements Directive) IV reforms will put an absolute cap on banker’s bonuses at 100% of salary from 2015.

Second, you can increase low pay. Cable also announced that he had agreed with the Low Pay Commission’s recommendations for a 1.9% increase in the National Minimum Wage. President Obama has also proposed a significant increase in the Federal level to $9 per hour “to raise the incomes of millions of working families,” meaning for U.S. businesses “customers with more money in their pockets.” Opposition Labour party leader Ed Miliband has committed to as yet undefined “support” for employers who go further and pay their staff a minimum of the Living Wage, if his party wins the next general election in 2015.

And third you can redistribute pay. Now I had thought that this would be the most difficult of the three for employers to effect in practice, although TV Channel 4’s documentary on Pimlico Plumbers last year showed it can be done. But what the Big Pay debate has highlighted is that we need to start joining up pay and reward agendas, considering how total payrolls are distributed and whether that allocation is fair and delivers “the best bang for the buck.”

When I started work as a “green” personnel graduate trainee at General Motors’ car plant in Luton in the early 1980s, there were separate toilets for manual workers and managers. Although these apartheid-style divisions are thankfully long gone, the worlds of executive and general employee rewards remain even more highly distinct, with different pay methods, processes and language, as well as very different pay levels.

The U.K. National Minimum Wage is currently £6.19 per hour and the Living Wage outside London £7.45 (£8.55 in London). FTSE chief executives, even assuming a 70-hour week, are on around £1,300 an hour. So they could almost fund a move for one of their employees’ annual salary from the national minimum to the living wage by forfeiting an hour’s pay.

Retailer Next Chairman Lord Wolfson generated some positive executive pay headlines for a change recently by sacrificing his latest £2.4 million long-term incentive payment to share among all Next’s hardworking employees. That works out at £124 each, or 1% of pay on average. Why, I wonder, did he have to make this generous personal gesture: Why hadn’t Next’s remuneration committee and HR department considered across the whole workforce who should get what? (His total pay still rose by 13% by the way.)

The High Pay Centre’s research has looked at the trade-offs more widely in society. There are 29,000 people in the United Kingdom (the top 0.11% of the income scale) who earn more than £500,000 a year. They take home £21,500 a month after tax. That is more in a month than someone on an average salary earns in a year (£20,500, after tax). If those earning more than £150,000 took a 10% pay cut and it went directly to the bottom 25%, they would get a 55p per hour pay rise to £7.35, taking them close to the national living wage.

Most of us can’t influence the national distribution, other than by our vote. But we can and should influence individual employers to consider such relativities, as well as the continuance of distinct status benefits for groups of staff such as executives. Are these as outdated as the separate toilets at the Luton plant?

The investment banker Roger Yount is amazed at the ability and performance of his children’s nanny Matya, given her low level of earnings, in Lanchester’s novel. HR professionals needs to help employers to join up their pay agendas and recognise that we no longer in the era of Thatcherite free-market economics. As WPP’s chief executive Sir Martin Sorrell, (himself no stranger to personal pay criticisms), has noted, “The debate has moved from payment for performance to what is fair pay.”