Monday 4 July 2011

Why the Ratio matters so much

The bad news: chief executive pay in the FTSE 100 increased by 55 per cent last year alone, accelerating the creation of an inflationary class of ubermensch, with huge consequences for social cohesion.

The good news: a more effective, imaginative and flexible corporate form – the mutual – increased by 25 per cent in the UK economy last year.

Both these facts are relevant to The Ratio, the new report by myself and Andrew Simms, which suggests forcing companies – and especially those bidding for public service contracts – to reveal the ratio between their bottom and top pay levels.

We may not be able to legislate to drag the ratio back down to 1:20, which John Pierpoint Morgan said was the maximum reasonable level. But we can make sure the crucial ratio is published on the front of annual reports, were they might motivate shareholder activists who can do something about it.

But it is also time to be more positive about this. For too long, campaigns against corporate greed and ever-widening pay ratios have tended to be defensive and negative. They have been campaigns against rather than campaigns for equity, or anything else.

This needs to change partly because having a compressed pay ratio is not just a good thing ethically. Nor is it just a better way of motivating staff and providing greater equity in society, with all the economic benefits that will bring.

It is also a sign that a company is sensitively, fairly and imaginatively run, that its management and board understands the role that all their staff can play, and that collaboration inside and outside the company is as important to their success as competition.

It is a sign of a company that is more flexible, faster moving, more imaginative and more successful.

It is our contention that a more effective corporate form is emerging based on these ideas. Many of these will be co-operatives, but some will simply have a more co-operative spirit that understands the need to include staff and use their resources more effectively.

In time, these companies will push aside the kind of corporate dinosaurs that minimise the pay of their lowest and maximise the pay of their highest echelons, a sign of fatal inflexibility and short-term thinking.

They will do so because these companies will earn more money, waste less on leadership fantasies and will be more successful.

But this is not yet widely understood, either in the corporate or policy world, and there needs to be a campaign to speed the process along. The faster this process takes place, the more successful and imaginative UK business is going to be.

To get there we need to encourage shareholders to use their power to encourage more equitable pay structures, to vote down unacceptable remuneration packages and to use their power to remove, where necessary, the chairs of remuneration committees.

The transparent ratio and the Charter of Responsible Pay which we suggest in our report are both means towards this objective.

They need to take place within the context of a wider debate about corporate behaviour that emphasises the benefits and inevitability of change, rather than simply complaining about the injustice of the current situation.

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