I recently asked whether it might be time to bury capitalism, as it does not seem to be serving society well. Since then, we've seen a short strike by NHS workers protesting over pay. Taking a very unscientific look at online message boards, people seem to fall into two broad categories. The first category is people who support the strikers. Those who point out that MPs have accepted an 11% pay rise. Those who remember the £1.162 trillion that was committed to bail out the banks. Those who point to the costs of each bomb currently being dropped on Iraq - estimated between £30,000 and £790,000 depending on the type of ordnance.
Making up the second category are those who disagree with the strikers. Strangely, most of the arguments against striking are based on the lack of pay rises in the private sector. People complain that the strikers should feel lucky to have their jobs. A number of commenters point to the fact that they haven't had a pay rise for 3, 5 or even 7 years. Shared misery seems to be the common thread - nurses shouldn't get a pay rise because we haven't had one.
The average chief executive now earns 120 times the pay of the average worker. This is up from 47 times in 2000. Despite a global recession, chief executive pay has climbed 278%, in contrast to worker pay, which has risen only 48% in the same period. It seems that the general population is being asked to make sacrifices that aren't being shared by politicians, the wealthy or the privileged. Rather than deriding striking NHS workers for asking for a 1% pay rise, private sectors workers might be better served by lending them support. The job market is competitive; if NHS workers secure a pay rise, it will put pressure on the private sector to follow suit.
Chief executives are earning more than ever in a country that now has more food banks than ever. In 2011-12, 128,697 people made use of a food bank. In 2013-13 the figure was 346,992 and this year, the number was 913,138. Almost one million people have been given emergency food supplies in the UK in the past year. 330,205 of them are children.
In that same year, Adam Crozier, chief executive of ITV, took home a pay packet of over £8million. We might be forgiven for thinking that trimming the salary of a chief executive will have little impact on employees, but the truth is that executive salaries are a disproportionate drain on an organisation's resources. For example, ITV employs 4,257 people. If Adam Crozier earned just under £4million instead of £8million, every single person in his organisation could receive £1,000 extra per year. More than four thousand people could be given noticeable pay rises at no additional cost to the organisation. Would Adam Crozier quit his job if he 'only' earned £4million? This is a crude example, but consider that most large corporations are run by senior management teams who have shared similar pay increases as the chief executives they serve. There's plenty of money to go round, but the problem is it's getting caught in a bottleneck.
To understand why wages have risen so rapidly at the top is to understand a profound aspect of human psychology. Only the extremely out of touch could argue that £4million wasn't enough to live comfortably for a year. The trouble is that people are competitive by nature. Sara J Solnick and David Hemenway conducted a study that asked participants whether they would rather earn $50,000 per year while people around them made $25,000, or would they rather earn $100,000 per year while people around them made $250,000. The majority of people opted for the former and preferred to earn less money as long as people around them took home even less than them.
At the top of the tree, we have billionaire industrialists, oligarchs and tech entrepreneurs. These wealth creators control riches beyond the imagination of most people. They can spend $800million on a yacht or $1billion on a home. With that as a benchmark, is it any wonder that chief executives would be unhappy with a couple of million pounds per year? Add into the equation the fact that most boards are populated by executives who have no interest in seeing overall compensation figures fall, and it's easy to see why senior executive compensation has risen at breakneck speed.
Chief executives and the senior team around them are management, they are not owners. More often than not, they are not entrepreneurs. They do not take the risks of business owners. If an entrepreneur fails at something, they can lose their entire business, their investment and more. Barring serious incompetence, most managers can rely on their continued salary. Their benchmark should not be the individuals in the wealthy tier above them. There is a strong argument that executives' total remuneration should be capped as a multiple of their average employee pay.
In Japan the average chief executive earns 67 times the pay of the average worker. Are British chief executives that much more effective than their Japanese counterparts to justify earning nearly twice as much in relative terms?
If chief executive remuneration was capped at 80 times the pay of the average worker in an organisation, CEOs would have a direct incentive to ensure that employees received an equitable distribution of earnings. Maintaining a healthy performance component of the CEO's overall remuneration would ensure that chief executive's interests did not become too closely aligned to their employees at the expense of shareholders.
The current trend is unsustainable. The nation is getting richer. Executive pay is rising. Overall wealth is rising, but it is not being fairly distributed. Police officers working two jobs to make ends meet. Nurses making use of food banks. Doctors who can't afford to live near the hospitals they serve. Mahatma Gandhi once said, "A nation's greatness is measured by how it treats its weakest members." Doctors, police officers, nurses, and teachers aren't even the weakest members of our society, but they're struggling to get by. If we're failing people who used to be regarded as middle class, what must life be like for the million or so people using food banks? And for the many others who are so disadvantaged that they slip through the food bank net?
Food bank use is rising almost as quickly as executive pay. If something isn't done to correct the worsening structural inequality in the economy, the government may find itself called upon to bail out the food banks and provide basic nutrition to people living in one of the richest nations in the world.