On salaries and greed?

Now we have a new First Minister, who’s pledged to reform the Welsh economy over the next few years, perhaps it’s time to think about how we remunerate people in Wales, and in particular those at the top of the tree, some of whom receive eye watering salaries. We have to accept this is a big task, but we could start with the values driven businesses, employee ownerships, co-ops and mutuals, and not-for-profits, and follow on with those supplying government and the public sector.

 

There are a number of reasons for the rush by executives to the top of the salary tree, some of which are quite complex, but whatever the motivation, it is creating an unhealthy society. My personal view is that one of the main drivers is a search for recognition. Whereas in the past individuals became recognised for their status in the community rather than in cash, and for their philanthropy – such as Carnegie building libraries, or business people supporting the local football team – now people seek recognition through obvious wealth.

 

This recognition drive is then reinforced by the logic behind Remuneration Committees, which are the method of setting top salaries recommended by the Financial Reporting Council. They employ specialist consultants to survey what others are paying, adjust for industry and turnover, and bingo, arrive at a “market price”. Any executives earning less than this rate get a rise, anyone earning more is left alone as their contract locks them in to that salary. The industry rivals see this change, redo their “comparethemarket” style survey, and the upwards only merry-go-round continues.

 

This, naturally, has led to an increasing disparity between highest and lowest paid. According to the CIPD, the mean average salary ratio in the Footsie Top 100 is currently 145:1 (top:mean), which is up from last year’s 128:1. Indeed, it has tripled since 1998, and risen fifteen-fold since 1970 when it was much, much lower at around 10:1. As a result, the UK is now reckoned to be second only to the US in executive pay.

 

There has also been an unwillingness by governments to tax the rich, and we have participated in a race to the bottom to attract the super-rich with ever lower tax rates. In the UK, we’ve seen a reduction in the top rate of Income Tax from an eye watering 99.25% in 1939, which stayed at 98% until 1974, and only dropped below 75% in 1985. In the US they followed a similar pattern as socialeurope.eu reports this month. In the UK in 1939 there was no point a business person paying themselves big money, as almost all of it went straight to the tax authorities, so they didn’t. They got their rewards from their status in the community rather than in cash. Now that has changed, greed is allegedly good, and the super-rich compare the size of their yachts or the gyms in their basements like a bunch of school kids in the playground.

 

This accumulation of private wealth by the rich has also been assisted by the increasing weakness of labour in the employment marketplace caused by the weakening of labour unions and the increase in the number of self-employed, who are largely unrepresented. This has led to the increasing inequality in accumulated wealth – now the top 1% in the world own more than the remaining 99%.

 

We’ve also seen this trend infecting the mutual, co-operative and non-profit movement. This has paralleled the shrinkage of their market share in the UK. The “Co-op” was the UK’s largest grocer in the 1960s, now it’s the fifth, and falling. Building Societies once had an almost total monopoly on mortgage lending, but since the relaxation of Bank of England rules on liquidity in 1980s, their share has dropped to around 25%. Mutual insurers now have only 8.7% of the UK market, as the big names like the Prudential have been de-mutualised. An increasing number of staff, and managers in particular, are now recruited from outside, rather than home grown, and so haven’t been steeped in the culture of this sector. They may have good commercial skills, but outsiders transferring in lack the understanding of the non-profit difference and have slowly diluted the culture.

 

One of the changes this has brought about is the idea that senior employees need huge salaries in order to motivate them has entered the co-operative and no-profit movement. Euan Sutherland was paid at a ratio of 330:1 (top:bottom) during his 10-month stay as CEO at Co-operative Group, and this didn’t bring much opprobrium on him or the Remuneration Committee which agreed it; he was criticised for other things. We’ve all got used to high pay.

 

Meanwhile, different ideas prevail elsewhere. Capping top salaries is already a much more popular policy than is generally recognised. Recent research by Harvard Business School and Chulalongkorn University shows that on average, people around the world think a ratio of 4.6:1 is the ideal. On Nov 23rd, 2014, in one of their regular referendums, over a third of the normally conservative Swiss voters supported a legally enforced overall salary cap of 12:1 (top:bottom), for all businesses in Switzerland. The campaign was backed by the Swiss TUC and other social organisations. Even some management consultants agree with the concept of a salary cap; the late Peter Drucker argued that any CEO-to-worker ratio larger than 20:1 would “increase employee resentment and decrease morale.” J Pierpont Morgan, one of the wealthiest men in the world of the early 1900s also thought that this ratio should never exceed 20:1.

 

My view is 12:1 is achievable in the real world right now, and we should start with the non-profits. If a company pays the real UK living wage of £9/hour to its lowest paid staff, and then they earn a typical (until recently) John Lewis bonus of 20%, the top executive can get almost £250,000. If they can’t budget their own lives to live really, really comfortably on that, then I’m not sure they are capable of running a large business, and they need to go.

 

In 2015 Dan Price, CEO of Seattle-based Gravity Payments slashed his $1 million compensation to $70,000 and announced he would work towards a minimum wage at the same level for his employees. He raised the minimum wage immediately to $50,000, rising again to $60,000 in December 2016, and $70,000 in December 2017.

 

Price started in business in 2004 when he was just 19, and still in high school, when he designed a payments system for a local Idaho businessman. He went on to launch the credit and debit processing company, Gravity Payments, and by 2017, it had grown to 133 employees.

 

The move wasn’t without controversy, both among those who thought his initial remuneration was too high and among those who saw it as a kind of socialist wealth redistribution. Price, however, insists he is not a socialist, and that his actions are based on the values he gained from his strict Christian upbringing.

 

Another example is the Mondragon Co-operative Corporation in the Spanish Basque country which operates on a set of principles which are built into its constitution, and which include the concept of “wage solidarity” – sharing income more equitably. The top salary ratio is capped in most of the constituent co-ops at 6:1 (top:bottom) although this is sometimes stretched to 8:1 to try to reduce the poaching of top management by other businesses.  Despite, or because of this, they have grown to be the fifth biggest corporation in Spain, and operate the third biggest supermarket chain in Spain, Eroski.

 

The Mondragon example is particularly relevant to us in Wales, as the Wales Audit Office’s improvement team are now looking at the Basque province’s policies, and how in particular the Mondragon Co-operative’s policies have helped the area rise from the poorest region of Spain when Mondragon was formed in 1956, to being second only to Madrid in GDP/capita at €31,776. This compares rather well with Wales’ €21,092 (£19,002).

 

So how do non-profits fare in Wales, when we look at their pay ratios? I’m afraid the answer is not very well, largely because they follow the standard Remuneration Committee model. The prize for top remuneration in a non-profit (salary + pension + bonus) goes to Glas Cymru, where the highest paid executive got £736,000 last year, and over at the Principality, it was £473,000. This indicates salary ratios of approx 40:1 and 25:1 respectively. Whilst these are a lot lower than the FTSE 100, they’re still high because they are linked to top salaries in the banking and water industries respectively.

 

This is surely a difficult time for Glas Cymru. Questions about their pay rates were asked by Neil McEvoy in the Assembly back in 2016, and in September last the Daily Mirror announced John McDonnell’s policy of potentially re-nationalising the UK water industry under the headline “War on the Water Rats”. This could potentially overshadow the good work done by the company over the years.

 

However, there are some small signs of change. Since the Glas Cymru Remuneration Committee reported back to the Members Meeting in December, there have been some internal discussions as to the way forward in the light of the sensitivity about top salaries in general, and it is due to be discussed fully at the upcoming AGM on July 5th.

 

When Nigel Annett and Chris Jones set up Glas Cymru in 1989 with the mission of buying out the failing Hyder business, it was a great experiment. No-one had ever taken on such a large project through a guarantee company financed by the UK’s largest ever bond issue of £19 billion. Since then they have achieved a number of things; improved water and beach quality, lower prices than other regions of the UK with a similarly long coastline, as well as attempting to address the issues of consumers on low incomes. They have even had run-ins with Ofwat as they have at times spent more on infrastructure improvement than Ofwat wanted them to. It would be a pity to see the good bits thrown away, but I fear renationalisation will come if things don’t change.

 

Ofwat, the industry regulator, was established to set prices for the water industry because it is almost entirely a monopoly provider, but it has no power to regulate salaries, and little power to limit the profit taking by the other water companies in England. We need the power to cap salaries and profits in all monopoly providers, as well as companies that supply government or provide its services.

 

In his election Manifesto, the new first Minister highlighted his desire to establish a new Co-operative Bank for Wales, and as part of its governance, he specified his wish to see it adopt a fixed salary ratio, although he didn’t specify the exact amount.

 

We should not be surprised if the Welsh Government now takes up the issue of excessive top salaries wherever it has the power to do so.

 

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