Friday the 4th of January was “Fat Cat Friday”. According to the High Pay Centre, only three days into the new year the average FTSE 100 chief executive would have already earned the average annual UK salary. The calculation is based on an average 2017 pay packet for these elite bosses of £3.9million. The High Pay Centre (HPC) is not just providing this information as an amusing fact. The think tank, which claims to aspire to ‘set out a road map towards better business and economic success’ says the report is supposed to highlight the problem of rising executive pay. The report claims that the salaries are not merited by talent and predictably recommends ‘greater diversity’ amongst remuneration setters.
Let’s start with the obvious. Executive pay is a matter for shareholders only. They are the only stakeholders besides the executive. They are after all the ones paying. Workers could theoretically be exposed if an excessive pay packet impacted the viability of the business, but no-one is suggesting that is ever the case. And reality is that workers are always exposed to bad decisions by shareholders and executives. Bad remuneration decisions are no different. Consumers could be impacted if an increased cost base leads to higher prices, but in a competitive, free market that has no more relevance than if a company makes a bad decision in procurement or choice of production method. If a product becomes uncompetitively priced, consumers move on to other suppliers. The ones who suffer are the shareholders. Society in general has no stake in executive pay.
The HPC want those in charge of remuneration to consider measures such as ‘employee well-being and investment in workforce training and development‘. But employee wellbeing and training are important parameters for most businesses already. Some shareholders may need reminding and as such the HPC is kind to highlight it. But there is no reason to be concerned that business in general are systematically underinvest in upskilling their workforce, for example.
But if the HPC diagnoses real issues, they have people on their side. Activist shareholders, who actively seek to change practices of the companies they invest in, have become more commonplace and recent times have seen examples of so-called ethical shareholders, who pursue other agendas than traditional profit maximisation. That is all well and good. If you own a company, or part of one, it is your prerogative to decide what the priorities of the company should be. The HPC can of course appeal to such shareholders to encourage them to share their priorities.
But in general shareholders are not stupid. The think tank has no way of knowing if executive pay is too high or too low but if the market for top executive talent is free and competitive – and we have no reason to suspect it’s not – it is unlikely that pay is too far from the ‘correct’ market price. And having the right CEO is crucial for success. WPP recently lost its place as the world’s most valuable advertising firm after new management struggled to fill the shoes of Martin Sorrell. In November, food company SSP saw its share price tumble when Kate Swann stepped down as CEO. Software firm Sage suffered a similar fate when Stephen Kelly left in August. Of course, most people would recognise Steve Job’s effect on the fortunes of Apple. It is not surprising that top talent command high salaries. The HPC is on a mission to outrage, to appeal to feelings of jealousy and envy to promote their egalitarian agenda (the think tank was established by the Labour affiliated Compass pressure group). A public which is constantly fed a (largely false) narrative of increasing inequality is always happy to take the bait. But British business needs to attract top talent to stay competitive and do not need a think tank to pontificate on what the ‘right’ level of pay is. Only the market can tell. Fat Cat Friday only serves to get the public worked up. That’s pointless – it’s none of their business anyway.