Executive pay argument is a distraction and not based on reality
Daniel Cowdrill 11.15am
Both David Cameron and Edward Miliband competed over the weekend to sound tough on executive pay. They both criticised what they see as ‘excessive’ pay at the UK’s biggest companies.
We were told that executives are on a ‘merry-go-round’, where remuneration committee members sitting on each other’s boards, ‘pat each other’s backs, and hand each other pay rises’.
A range of policies are now being proposed to combat this percieved corruption, such as making pay rewards legally subject to shareholder votes.
However, the definition of the problem bears no resemblance to reality. Research by Manifest shows that only 5 per cent of FTSE 100 directors sit on another FTSE 100 board, and of these only twenty directors sit on another company’s renumeration committee.
As Robert Peston has said, there is ‘no practical mechanism for executives of different companies to pay lavish amounts to each other by sitting on each other’s boards, in the way that Mr Cameron seems to believe is rife.’
Furthermore the idea of executive pay being accountable to shareholders, nice as it sounds, isn’t that simple. With globalised capital investors are more transient. Their interest may only last a few days or even a single morning. Longer term investors tend to be ‘sleeping’ investors, more interested in the value of the company rather than the parochial matter of individual pay agreements.
A small investor may hold shares in twenty companies listed in London; a big investor in many more companies across the world. They are hardly likely to have the time or the inclination to pour over the pay deals of every single executive.
In the unlikely event that executive pay becomes so unwieldy that it affects company productivity, I wouldn’t mess about leading a campaign against the board of directors. Quite simply, I’d sell my shares.
However, this misguided perception of cronyism and the equally misguided response of our political leaders is not my main concern. My concern is that the sheer political effort being expended on the issue is a distraction from declining social mobility and entrenched educational underperformance.
In his second principle of justice, John Rawls argued that social and economic inequalities are fine as long as they satisfy two conditions: first, that positions and offices are open to all under conditions of fair equality of opportunity; and second, that inequalities are to the greatest benefit of the least advantaged members of society.’
I broadly agree with this principle, yet it is evident that the tax collected from blue-chip companies and their executives, which must amount to tens of billions of pounds, is not being spent effectively on education and training. It is vital that young people are equipped with the tools to compete in the global market place.
Only seven other OECD countries spend more than the UK per pupil (approximately £54,000), yet the UK is falling down the respected PISA survey. In 2010, the UK was ranked 25th for reading, 28th for maths and 16th for science. In 2006, when 57 countries were included in the study, it was placed 17th, 24th and 14th.
Significantly, the UK has a greater variation in reading standards attributed to class differences than almost every other country in the OECD. The proportion of students from poor homes who achieve higher than expected scores is lower in the UK than across the OECD on average. Just 24% as against an OECD average of 31%.
Furthermore, the UK is one of only a few countries where richer pupils have more teachers than poorer ones. Only in Israel, Slovenia, Turkey and the US is this also the case.
We would be better advised to spend the same political effort on driving education and training for millions of young people rather than on a misguided war against the pay of a small minority of executives.
