Pay Inequality: What to do?

Pay Inequality: What to do?

Bank bonuses can now be a maximum of 100% of annual pay, or 200%  if shareholders agree. The Chancellor of the Exchequer’s attempt to have this European Union regulation set aside has just failed. There is now an attempt to simply increase annual salaries of directors, with “allowances”. These “allowances” are paid in addition to basic salary and bonuses. The European Union  has just ruled that these “allowances” are in breach of the bonus size regulation. This is no surprise!

The simplest way to get around these regulations would be to increase basic salaries. But this would make pay “packages” simpler to understand, as there would be no bonuses and no “allowances”. Further, the distance between the lowest paid bank workers and the highest paid directors would become more transparent. All this might increase popular and political objections to the exorbitant pay levels of those at the top of the banking industry.

In 1997 chief executives in the FTSE 100 were paid 47 times their average employee. In 2012 this rose to 133 times the average employee. Given the average wage is now around £25,000.00; this produces a figure of  over £3.3 million per annum for the chief executives. How can this distance of 133 from the top pay to the bottom be reduced?

Some relationship between pay increases at the top, and those at the bottom, needs to be introduced. This could take many possible forms. Say a figure of 5% was an annual increase at the top; then a similar 5% should be added to the bottom. This might stabilise the 133 relationship between the top and the bottom. Pay increases at the bottom of 5% would, however, be well above inflation and very welcome. But the distance from top to bottom would not change very much.

A more effective possibility would be where companies award directors a bonus of 200% of basic salary, with shareholders support, then those at the bottom should get double their previous increase. If the previous increase was say 5% , then it would rise to 10% of basic pay. The previous stable relationship of 133 to1would now be lost. This might create a fear of inflation as well. But there might be an increase in the perception of this system as more fair.

More radical options include pay freezes. Pay freezes for all; or pay freezes only at the top, to allow the 133 to 1 relation to progressively fall over time. Or where bonuses of some sort still exist, replace percentage rises with sums of money. These sums could be defined variously as related to length of service; to between 3 and 6 months pay; to one’s position in a company hierarchy; to be being set by a remuneration committee for all employees, with union representation on all such committees.

None of the above schemes radically reduces the figure of 133. Indeed, 133 could rise. Further, none have any chance of implementation without popular support, and political will. A final objection is that those on low pay and zero hour contracts would become even more attractive to companies.

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