Why tackling high pay is in the national interest

By Deborah Hargreaves, Chair of the High Pay Commission

British business is facing a crisis. The public has lost faith in the corporate sector, which it sees as monolithic, money-grabbing and uncaring. Excessive pay for company bosses has added to the malaise. As those on middle and low incomes face a sharp squeeze in their living standards, corporate leaders are awarding themselves 49% pay rises. These bosses see little irony in then lobbying to repeal the 50p top rate of tax paid by those on £150,000 or more. These are the same leaders who are arguing for real-term cuts to the minimum wage, because, after all, aren't we all facing times of unparalleled austerity?

Directors' hypocrisy over pay reinforces the view among the public that businessmen are "in it for themselves". It is worrying that trust in big business has sunk to this extent when there is so much emphasis on the private sector leading us out of the economic crisis. In polling for the High Pay Commission, 79% of those questioned said pay and bonuses were out of control.

Our year-long inquiry has led us to believe that excessive top pay levels are not only corroding trust in business but also damaging society and the economy as a whole. In the last 30 years we have seen rewards channelled upwards. The top 0.1% of earners have pulled away from the rest at a rapid pace. In 1980, for instance, the boss of Barclays was earning 14.5 times average pay at the bank; the current boss, however, is on 75 times the average, representing a 4,899% rise over that 30 years.

During the same period average UK wages have gone up threefold and pay for a senior policeman or schoolteacher has risen sixfold. Of course, leading Barclays today is a different proposition, but the lives of a policeman and headteacher have also changed beyond recognition in that time.

Since the mid-1970s the general workforce's share of GDP has shrunk by 12%. For years, this sleight of hand went unnoticed – we all felt we were getting richer on the back of a rising housing market. But as the economic crisis has started to bite, the fact that company bosses seem to be living in a different world has become increasingly apparent.

The story of the last 30 years is not just one of corporate greed, although that is part of it. Companies say they have to compete in the global market for talent, and pay accordingly. This has gone hand-in-hand with the cult of the superstar chief executive – someone who can sort out a company's woes and make a lot of money for shareholders.

Yet our research has shown little connection between pay and performance; top executives rarely cross the world in search of work and even when they do, the role can be too much for just one person.António Horta-Osório was recruited in March from the Spanish bank Santander to run Lloyds Banking Group on a package of pay and shares reported to be worth £12m, but eight months later is off with stress. Maybe we are just expecting too much from our top bosses.

Just as important, we have found that large gaps in pay undermine employee engagement, leading to low levels of motivation, effort and co-operation. Pay is too often set by a closed shop of individuals on remuneration committees with little regard to the conditions among the rest of the workforce, and the packages have become so complex that even shareholders struggle to understand how much they are worth.

Pay in publicly listed companies sets a precedent. When it rewards failure, it sends out the wrong message about business and is clearly a symptom of a poorly functioning market. High levels of inequality in income contribute to sectorial imbalances, regional disparities and asset bubble inflation.

Society suffers too when there are huge income disparities. When the gap widens, it does not encourage aspiration or cohesion but rather disengagement and social unrest. Academics have warned that inequality can lead to instability, with poorer groups pursuing their objectives outside the mainstream.

We believe it is imperative to tackle excessive pay not just for the greater good of society but for businesses and the health of the economy. There is gathering momentum behind the idea of the need to address the excesses of capitalism, and we could be at a tipping point where companies risk losing all credibility through their attitudes to pay.

Interestingly, many business leaders we interviewed revealed they were motivated by goals other than money. And when pay is important to them, it is often as a means of measuring themselves against rivals. Unquestionably, some of Britain's more reflective businessmen are already sensitive to the public debate around pay, and see the current system as unsustainable.

Nevertheless, we do not expect anything to change overnight. We need to effect deep cultural change; we need to ask what sort of society we want to live in and shift priorities accordingly. As an important first step, we have produced a 12-point plan of action, basing our recommendations on the key principles of transparency, accountability and fairness.

We advocate getting back to basics: reducing packages to a base salary that would make directors' pay more comparable with the rest of the workforce. This would eradicate those big bonuses that appear so easily won as to have become a part of base salary, no matter how well an executive's firm performs.

Remuneration committees should have the flexibility to award one performance-related element, preferably of shares to be held over the long term. We are also calling on boards to produce one figure for each executive's remuneration – at the moment this is nowhere to be found and when worked out, is always hotly disputed.

We also want to see the reform of committees that set pay, with a worker representative elected by the staff to inject a little common-sense thinking into the closed-shop mentality. These committees are meant to set top pay with regard to what is happening in the rest of the company but often only pay lip service to that remit. A staff rep could remind them of the pay freeze that might be in place for employees at the moment.

Other reforms would help move towards greater fairness in setting pay or at least get firms talking about what is fair. We have seen cross-party support for many of our recommendations, and we will continue to develop them. But we are calling on companies to recognise that it is in their best interests to act now to resolve this, before more draconian rules are imposed from above.

Deborah Hargreaves is chair of the High Pay Commission

This article first appeared in The Guardian

Graphics are from the High Pay Commission report "Cheques With Balances: why tackling high pay is in the national interest"