Who ate all the pie? Executive pay, effort & luck
By Tim Thorlby
7 min read
The 5th January 2023 is High Pay Day – the day of the year when the median FTSE 100 CEO’s earnings have already exceeded the average UK worker’s entire annual salary. It doesn’t take long does it?
Pay is in the news all the time at the moment. As inflation has risen, anxiety about wages has increased too, with many looking for pay rises to keep up. It has prompted a wave of industrial action.
What are we to make of the huge salaries being earned by those ‘at the top’? Does it matter? Is it fair? Is it merited? This blog explores executive pay and offers a biblical perspective on it.
1 - What is high pay?
Times have been tough for many in recent years. But not for the UK’s top chief executives; they are doing rather well.
Top 100
The High Pay Centre’s latest round-up of top earners found that the FTSE 100’s highest paid Chief Executive is Mr. Sebastien De Montessus of Endeavour, a multi-national mining company, based in London. He earned £16.85m in 2021[1]. Lucky chap. This is 539 times more than the typical UK worker, who took home £31,285. (Note that I am using ‘high pay’ as a shorthand for all kinds of remuneration including salary, bonus, share options, etc).
More generally, the median CEO salary for FTSE 100 bosses was £3.41 million, 109 times that of the typical UK workers. A lot of lucky chaps! (91% are male, so, yes, mainly chaps.)
This is not a record, either. During the pandemic in 2020 these top salaries dipped a little, but are now rebounding, back towards their historic pre-pandemic highs.
Top 1%
High pay is not just restricted to these few hundred lucky people. The top 1% of earners in the UK earn about 8% of all income between them, and that is 280,000 households. Lots of lucky people![2]
Top 20%
More widely, the top 20% of earners in the UK take over 41% of all household disposable income between them. That is a large portion of the national pie. The picture is therefore very uneven between households across the UK and goes way beyond a lucky few hundred; the top 20% of households is 5.6 million households.
If you are wondering, the top 20% of households starts at a disposable household income (i.e. after tax) of £62,282 and goes up. Not as high as you might think?
Studies of public attitudes to wealth show that most people tend to think of themselves as being ‘in the middle’ of the national distribution. In other words, most people think of ‘the rich’ as other people, even when this is not the case[3].
2 - Why does it matter?
Earned income will always vary. The question here is about ‘high pay’, meaning pay which is significantly higher than that being earned by the majority of other people.
There are a fair number of people who will defend high pay as entirely natural and deserved in a free market and a free society – including, unsurprisingly, many high earners.
Their argument is that such income is justified on the grounds that these people have uncommon skills and experience and that if the market places a high monetary value on this, then so be it. In this argument, a person’s market value is an effective measure of their social contribution, that is, their value to society. The market delivers a ‘fair’ outcome. It is an old idea, dating back to the earliest days of classical economics.
The problem with this argument, simple though it sounds, is that it fails to reflect the evidence.
Firstly, the idea that the high paid are somehow ‘working harder’ than everyone else is easy to dispel and somewhat insulting to millions of workers. The social care worker on a minimum wage is working just as many hours and sweating just as much as any CEO who is putting in long hours. Hard work does not distinguish them.
Secondly, perhaps more beguiling is the idea that ‘the market’, through forces of supply and demand, acts on people with scarce talents and qualifications and dishes up salaries and rewards which should be respected as ‘fair’.
The problem with this argument is that it assumes that market forces reward effort in a fair fashion. As Michael Sandel has eloquently argued recently[4], this idea is actually built on assumptions that few actually share. Our rewards in the labour market are not just determined by how we exercise our skills (our ‘effort’) but are also strongly influenced by our natural talents (which we inherited), our family situation (also inherited), early investment from others (such as our education, chosen and paid for by others) and also the vagaries of which goods and services happen to be in short supply at the moment, which also usually has little to do with us.
The idea that the market correctly calculates our genuine worth to society is or solely rewards 'my effort’ is nonsensical. The size of our salaries and bonuses have as much to do with sheer luck as they have to do with talent. Once we accept this, then we can see that market outcomes are not always ‘fair’ and that my financial rewards are perhaps not always fully deserved.
As Sandel concludes:
“…for all our striving, we are not self-made and self-sufficient; finding ourselves in a society that prizes our talents is our good fortune, not our due. A lively sense of the contingency of our lot can inspire a certain humility: “There, but for the grace of God, or the accident of birth, or the mystery of fate, go I.” Such humility is the beginning of the way back from the harsh ethic of success that drives us apart. It points beyond the tyranny of merit toward a less rancorous, more generous public life.”
Thirdly, even economists are of the view that large inequalities of income may be unhelpful, suggesting that excessive inequality may undermine economic growth in the long run as it reduces investment in ‘human capital’[5].
Fourthly and finally, high pay does not command much support from public opinion either. The public in the UK is not persuaded that high pay is justifiable. A recent poll found that 62% of the public believed that a CEO’s pay should not be more than 20 times that of their lower paid employees[6]. The British sense of fair play is not supportive therefore of the sorts of enormous pay ratios we have just considered above, with ratios of over 100:1 in our FTSE 100 companies for example.
So, high pay may not be a fair reward for effort, it appears to undermine national economic growth and the public aren’t keen. What does a biblical perspective have to offer?
3 – A biblical perspective
A biblical perspective on remuneration is reasonably clear. The Bible as a whole is supportive of private enterprise, hard work and rewarding workers for their effort. It has tough words for the lazy and those who will not work (not to be confused with those who cannot work).
It also acknowledges, not unsurprisingly perhaps, that it is better to be prosperous than poor, and that worldly wealth can be good for families, communities and nations. So far, so good.
But what of the big salaries and bonuses? The gulf between the hard-working rich and the hard-working poor?
Here, there are two points, I think, that help us unlock a biblical perspective.
Firstly, we can see that the market is neither free nor fair and is not a reliable arbiter of what is ‘deserved’ or ‘merited’ in terms of financial reward. Just because the market allows a person to command a high salary at a particular point in time does not mean that this is necessarily earned or justified. As Michael Sandel helpfully highlighted earlier, the vagaries of market forces and my own good fortune in life undermine any idea that my salary is entirely down to my own genius and hard work. So, just because we can earn a huge salary does not mean we are morally justified in doing so; it is also due to some good old dumb luck, not to mention the hard work of every other employee in the same business. In the world of work, no man or woman is an island.
The Bible calls each of us to adopt a perspective on life marked by both truthfulness and humility. This situation requires both. An honest view of remuneration (“I accept that the market is not always right”), with a dash of humility (“I’ve been rather lucky”) in place of hubris (“I did it all myself”) provides a clearer approach to remuneration.
As an aside, it is worth noting that many top salaries are not really set by markets at all but by small groups of directors sitting on ‘remuneration committees’. There has been much debate about the proper process for setting executive pay and the risks of self-serving decisions made by small groups, but it is clear that in many firms the process remains problematic and ripe for abuse. Even institutional investors are now beginning to demand changes; in 2022, over two thirds of JP Morgan’s investors voted against the proposed $200 million pay package for the bank’s top six executives, with advisors describing it as ‘excessive’.[7] The Bible condemns abuses of power wherever they occur.
Secondly, we also know from the Bible that human beings are created in God’s image and are therefore more than just economic units to be traded via contracts. We are created to relate to each other in families, communities and nations and have mutual social obligations; a social covenant. We sail in the same boat (whether we like it or not).
So, markets are great tools for us to use, but they cannot be allowed to have the final word on our worth as human beings or how we relate to each other. Many of our social problems today stem from a failure to appreciate this and the excessive power we have granted to indiscriminate market forces.
So, in respect of remuneration then, decisions about pay cannot be made purely with reference to the individual – the wider social ramifications need to be pondered too. The biblical perspective we are called to adopt is that of mutual obligation (or “love your neighbour”, if you prefer). With this in mind, significant pay inequalities are only really possible to justify by wilfully ignoring our social responsibilities and how markets really work.
A biblical perspective therefore calls for humility, truthfulness and acceptance of our mutual social obligations.
Two stories from the Bible illustrate this. The Old Testament tells of the ancient practice of ‘gleaning’, whereby landowners do not harvest to the very edge of their fields, but allow the less wealthy workers in their community to harvest what is left. A good farmer generates a decent harvest but also declines to ‘maximise his returns’ and accepts his wider social obligations.
Contrast this with the New Testament parable of the farmer whose farming genius leads him to grow his harvest every year, requiring him to build ever bigger barns to store his wealth. This farmer is roundly condemned – not for growing his business, but for his selfishness in keeping it all to himself. His mistake was not just a lack of generosity but a failure to recognise any dues to others (his workers) or his wider social obligations.
4 - What can we do?
There is probably a case for reforming corporate law around executive remuneration, but such changes take years and can often be circumvented. In the meantime, what can we do?
For any business which seeks to act responsibly, there are important actions which can be taken now.
Establishing good practice – What guidance is there on high pay? Well, Peter Drucker, a famous management expert recommended a maximum ratio of 20:1 within a business (i.e. CEO pay : average workers pay)[8] to prevent the demotivation of employees. He was not making a moral argument, just recommending good business sense. A majority of the UK general public agree that 20:1 is a good maximum ratio too. Many Certified B-Corps businesses cap their pay ratio at between 5:1 and 10:1 (i.e. top salary : bottom salary). In my last business, the ratio was closer to 2:1.
In the UK today, with a real Living Wage of £11.95 per hour, and assuming this was the lowest wage in a business, then a ratio of 10:1 would still allow the CEO to earn nearly £250,000 per year - hardly a trivial salary. There are clearly no ‘rules’ here but we can see that good practice is for a fairly low ratio, and that this still allows plenty of scope for varied and fair remuneration at all levels. If you work in a business, what’s your ratio?
Publishing information on high pay – the law requires larger listed companies to publish information about their executive pay and the ratios of low to high pay within their business. Any business can do this voluntarily and it would be good to see more firms do this. If you are a business leader, an employee or an investor in a business, why not push for this?
We do not have to accept the world as we find it. Conventional market wisdom is not always right, either morally or even economically. We don’t always have to wait for Government to lead. On issues like high executive pay, we can choose to model a better way – as investors, leaders, managers, employees, consumers. How can you lead change today?
This blog was written by Tim Thorlby. If you found it interesting, you can subscribe for free alerts for future blogs.
Notes
[1] Hildyard, L., et al (2022) UK CEO Pay Report, High Pay Centre & TUC | Access here: https://highpaycentre.org/wp-content/uploads/2022/08/CEO-pay-report-2022-1-1.pdf
[2] Data on disposable household income for all 28.1 millions UK households is for 2020-21, from ONS: The effects of taxes and benefits on household income, disposable income estimate | Access here: www.ons.gov.uk
[3] The Equality Trust (2020) What do people think? | Access here: https://equalitytrust.org.uk/what-do-people-think
[4] I highly recommend his book: Sandel, M. J., (2020) The Tyranny of Merit: What’s Become of the Common Good?, Allen Lane. The quote is from the Conclusion.
[5] Bruckner, M. & Lederman, D. (2015) Effects of income inequality on economic growth, CEPR | Access here: https://cepr.org/voxeu/columns/effects-income-inequality-economic-growth
[6] High Pay Centre (2022) High Pay Centre Analysis of FTSE 350 Pay Ratios | Access here: https://highpaycentre.org/wp-content/uploads/2022/05/STA0422803002-001_aFFT-Pay-Ratios-Report_0522_FINAL_v4.pdf
[7] Story in the FT on 17th May 2022, by Joshua Franklin, Only 31% of investors backed chief executive’s remuneration plan | Access here: https://www.ft.com/content/cd34c86b-1253-467a-aa83-23a78b81fcb4
[8] Cited in the Washington Post: https://www.washingtonpost.com/news/on-leadership/wp/2013/09/19/whats-the-right-ratio-for-ceo-to-worker-pay/