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How do we get fair pay?

How do we get fair pay?

29th November 2011

Last week the High Pay Commission published a report showing the rising wage inequality across the UK and the impact it has on individual wellbeing and the economy. IPPR senior researcher, Kayte Lawton, sets out the options for making pay fair.

The question of what to do about excessive top pay remains high on the political agenda, with November bringing the publication of the High Pay Commission’s final report and the closing of the government’s consultation on executive remuneration. IPPR research has found that two thirds of British workers think the gap between the highest and lowest earners in their workplace is too large.

Concerns about executive pay and are rooted in a sense that pay has been decoupled from any sensible notion of desert or fair reward, as Will Hutton’s review of fair pay in the public sector makes clear. But this unease stretches far beyond bankers’ bonuses and directors’ pay. IPPR research has found that many of us are troubled by the apparent disconnection between what we contribute in the workplace, and what we receive in return.

In workshops with nearly 50 people earning between £10,000 and £150,000, many participants questioned the ‘talent myth’ that implies a handful of top earners are responsible for a company’s success. By reflecting on their own workplaces, participants recognised that many people, at all levels, influence company performance and should be fairly rewarded when things go well. The notion that, within an organisation, everyone contributes and everyone should be rewarded accordingly united participants on low, middle and high wages, offering a majoritarian platform for reform.

Research by the Resolution Foundation and the TUC has uncovered the shrinking share of national wealth paid out in wages, and the falling share of wages going to low and middle earners. Wage inequalities between people earning at the 10th decile and those at the 90th decile have grown considerably over the last 40 years, and earnings for the top 1 per cent have been ‘racing away’ from those of the rest of us. Latest official figures show that median wages rose by just 0.4 per cent in the last year, while average pay for the top decile increased by 1.8 per cent.

Experts have found that rising wage inequality is the result of changes in the demand for people with high, mid-level and low skills, driven at least in part by the increasing use of technology in the workplace. While this trend is clear, by itself it cannot explain why wages for the low skilled have fallen relative to the median; why pay for the top 1 per cent has risen so dramatically; or why there has been a considerable increase in wage dispersion within narrowly defined occupational groups.

A full understanding of complex changes in the wage distribution requires a further layer of explanations that emphasise the changing power relationships within workplaces and the wider economy. Most notably, the relative bargaining position of many low and mid-wage workers has declined substantially over the last few decades as union membership and the scope of collective bargaining have shrunk. Given the UK’svoluntarist model of labour market regulation, it is not surprising that low-wage workers lose out when union power declines.

At the other end of the labour market, the increasing influence of the finance sector has enabled senior finance workers to gain a growing share of the wage bill, and pushed up top pay in other sectors. This has been accompanied by the proliferation of performance-related pay, which has facilitated increasingly complex pay deals that in practice are not always closely linked to performance; and an increasing focus on short-term profit maximisation rather than long-term growth and investment. The influence of the finance sector has spread to other organisations, including the public sector, with directors benchmarking themselves against the highest paid finance executives instead of top earners in their own sectors. The spread of performance-related pay and individually negotiated pay deals in both the public and private sectors creates space for wider pay disparities within similar jobs, and for the most articulate to argue for ever bigger pay deals. 

Some of our workshop participants raised concerns about the ability of top earners to take an increasing share of the wage bill, and stressed the power imbalances that often lie behind decision-making around pay. Some felt powerless to influence decision-making around pay (and other important issues) within their own workplaces. For many, managers seemed unaccountable to staff, top pay deals were felt to be disengaged from the rest of the workforce and the efforts of the majority of staff were not properly recognised.

This is not just a problem for employees who feel unrewarded or detached from management decision-making. The incentive structures that managers operate in, which push short-term shareholder return and drive up pay deals for a small group of top earners, have created unstable and unsustainable economic system. Some countries that take a longer term view of growth and create space for a wider range of stakeholders to influence company activities, beyond just shareholders, seem to have weathered the economic storm better than the UK. As we search for policies that will return the UK economy to growth, we could also learn from our more sustainable and resilient competitors.

Shareholder activism has a role here but is insufficient by itself given the large portion of shares in UK firms held outside the UK, and the continuing desire for short-term returns from most shareholders.  Most shares held in the UK are managed by fund managers, who tend to be highly paid themselves and so not best placed to tackle pay disparities. More important is the need to find ways to institutionalise broader interests into corporate governance processes, so that decisions around pay are not made purely with an eye to short-term profit maximisation, but to the longer term interests of the company, which almost always includes the longer term interests of the workforce.

Corporate governance models that facilitate formal employee influence in decision-making, such as works councils or employee representation on remuneration committees or company boards are vital. One way to make this work in the UK, which lacks a strong history of social partnership or employee influence in the corporate world, would be to require larger companies to seek the views of employees on a few key issues, such as the distribution of the wage bill across pay grades. This could help stimulate the creation of works council-style employee forums. This isn’t to say that employees would have any right of veto over major decisions; merely that they would have to be consulted through formal and representative channels. Reforms to company law and the corporate governance code might be needed to support this new role for employees.

We should also remember that the UK has some history of employee influence on pay-setting and other major corporate decisions, through employee-owned businesses and support for employee share-ownership. The impact of these models is limited at the moment but could provide a basis for expanding the role of employee influence on pay and broadening out the UK’s narrow conception of corporate governance. One option could be to introduce a ‘right to buy’ for employees when a privately owned firm is being sold, giving employees first refusal before trade sales or management buy-outs are considered. There is some evidence that this, combined with financial support, has worked well in the US.

Driving up employee influence in the corporate world is tough in the UK context, where workers often lack the backing of unions and the dominant narrative is one of giving managers free reign. But some of our major companies have already signalled that they are looking for alternative way of doing business in the aftermath of the crash. The key to this agenda is to tie it closely to an economic case that employee influence and a broader conception of corporate governance can help our companies become more sustainable and resilient, helping to reduce the risk of extreme boom and bust that is so damaging for both companies and staff.

Kayte Lawton is senior researcher at the IPPR. The IPPR's report on fair pay will be published in the new year. If you have any comments or thoughts on this article, email Kayte at k.lawton@ippr.org