UK corporations are required by the corporate governance code to take the pay of all employees into consideration when setting executive pay.
Over the last decade, pay for a FTSE 100 chief executive officer has risen from 100-times that of the ordinary worker to 130-times. Comprehensive figures going back further are difficult to find, but research from the High Pay Commission suggests the ratio stood at about 15:1 in the late 1970s.
This implies that the responsibility to relate executive pay to conditions for the wider employee base is not being taken entirely seriously by corporate remuneration committees. That could have negative consequences for UK businesses. Research has repeatedly suggested that an increase in the pay gap between the highest and lowest-paid employees leads to a corresponding decline in organisational performance.
For example, US academics Cowherd and Levine’s 1992 analysis of manufacturing firms in Europe and North America found that an organisation that maintains pay for the top three levels of management at the national median for similar positions, while raising lower-paid workers to the top 30% for their level of skills and experience, would experience a 7.4% increase in product quality.
Real-world experience bears out this analysis. There are many instances of industrial disputes in which the ire of low-paid workers has been exacerbated by huge pay awards lavished on senior executives. British Airways chief executive Willie Walsh gave up his bonus in 2010 in an attempt to stave off strikes by cabin crew staff. Last month, BBC employees voted on strike action, claiming that a £650 pay increase was unacceptable when top staff are paid more than £1 million.
The requirements stipulated in the corporate governance code and the effect of top pay on employee morale provides both a regulatory and a practical basis for human resources managers to play a role on executive remuneration committees as the department responsible for employee relations.
Such a move would also encourage a necessary re-evaluation of the role of HR more generally. While one might expect, for example, a marketing director to argue for a bigger marketing budget or an IT manager to lobby for new computers, it is more difficult to imagine HR managers calling for measures that would lift employee morale or improve working conditions, such as a pay rise or increased holiday entitlement.
This perhaps reflects the extent to which HR departments operate as a tool of senior management for imposing their will on the workforce, rather than as a medium for genuine dialogue with the aim of engaging and motivating employees. Giving HR managers a responsibility to challenge executive pay, backed up by the corporate governance code, and alongside the High Pay Centre’s recommendation of an elected employee representative on remuneration committees, would remind HR departments of their wider responsibilities, and help make British workplaces happier and more productive.
Luke Hildyard is head of research at the High Pay Centre