It’s now nearly four years since the Covid-19 pandemic and ensuing lockdowns upended the economic status quo in the UK and countries around the world. From workers being furloughed or working from home to CEOs taking solidarity pay cuts and low-paid employees becoming redefined as ‘key workers’, there was hope that this gloomy period might birth a new socio-economic settlement – one where we ‘build back better’.
Since the majority of Covid-19 restrictions have been lifted, however, the pre-pandemic economic model appears to have remained largely intact. Meanwhile, inflation, higher taxes and low wage growth mean that workers have seen their living standards decline at the fastest rate in the post-war era.
Latest analysis
The findings from the High Pay Centre’s latest analysis of the pay ratios of the UK’s top companies is evidence of this return to a broken status quo. It shows that, in 2022, CEOs at FTSE 350 companies with over 250 employees were paid 57 times more than the median worker at these companies.
This is almost identical to the 2019 ratio of 58:1, pre-Covid-19. During the first year of the pandemic, that figure dropped to 41:1 due to CEOs taking solidarity pay cuts. Post-lockdown, it has jumped straight back up.
Since 2020, London Stock Exchange listed companies with 250+ employees have been mandated to disclose the pay ratios of their CEO’s pay in comparison to workers at the 25th (lower quartile), median and 75th (upper quartile) percentile of the pay distribution of the company’s UK employee population.
In 2022, CEOs at FTSE 350 companies with over 250 employees were paid 57 times more than their median worker
This new requirement was designed to encourage greater transparency of pay practices within companies – and to make companies justify the often enormous gaps between CEO and average worker pay.
Then-Prime Minister Theresa May originally promised to go further, including to require workers had positions on boards – part of a suite of corporate governance reforms meant to add substance to her calls for tackling the burning injustices in British society. But a lack of cabinet support and opposition from the CBI meant that these modest reporting requirements became the extent of reforms introduced under the May government.
These disclosures are not always helpful in judging the fairness of companies’ pay policies. For example, since companies are only required to provide data based on full employees of their companies, outsourced workers are not included.
This means that in the case of two companies in the same sector, if company A were to outsource its lowest paid workers, while company B includes them as full employees, A may appear to have lower pay ratios than B – even if it were paying its outsourced employees far less.
Flawed data makes it unwise to judge the fairness of a company’s pay policies simply based on big or small ratios. That said, looking at these ratios in the round reveals huge inequality between workers’ and executives’ pay.
Trickling sideways
Some commentators argue that inequality within companies is necessary to motivate workers to compete for more senior positions in order to earn higher wages. Their argument follows that this dynamic raises the productivity levels of the workforce at large, while the most talented employees enter senior positions – providing the ‘high quality’ leadership that enables companies to be successful.
The problem with this argument is that the differentiation between the pay of most workers is not actually that wide. Workers at the upper quartile are typically paid only two times more than workers at the lower quartile. The gap sits right at the top: CEOs are paid 38 times more than employees even at the upper quartile.
Only a very small percentage of senior management are paid wages far higher than typical UK workers. The result is less a functioning meritocracy as commentators claim, and more like an under-paid workforce led by a tiny, excessively remunerated elite.
The picture is less of a functioning meritocracy, more of an under-paid workforce led by a tiny, excessively remunerated elite
The vast majority of UK workers are experiencing a declining quality of life during the cost of living crisis in this context. Those in senior roles, who are being paid so much more than their colleagues, remain quite secure. It would take a far more extreme economic crisis to make even a dent in their material well being.
It is no surprise that polling from the High Pay Centre has previously found that members of the public overwhelmingly think that CEOs should be paid at maximum 20 times their low or middle earning colleagues. Just three per cent support pay awards more than 50 times those of low or middle earners.
Workers voice
How can we bring about a fairer, more inclusive economy in this context? Changes at government, regulator, investor and business levels are all needed. Strengthening worker voice is essential. This includes scrapping anti-trade union legislation to allow trade unions access to workplaces, to inform workers of the benefits of collective bargaining.
Evidence shows both that countries with higher trade union density have lower levels of inequality – and reveals a direct correlation between declining trade union density in the UK and the widening of pay gaps between executives and workers.
We must also legislate for worker representation on company boards. Aside from the benefits this would bring in terms of enabling fairer pay policies at companies, increasing worker voice in the boardroom can strengthen decision making as the perspectives of the workers actually helping companies achieve their objectives are brought into boardroom discussions.
Amending company law to give the interests of all stakeholders equal importance, rather than elevating shareholder interests above all else, can also make a positive difference to pay disparity.
As long as companies are legally required to prioritise shareholders over their workers, their customers and the environment, they will only prevent efforts to enable a fairer and more equal society.
