‘If you tell a lie big enough and keep repeating it, people will eventually come to believe it,’ said Joseph Goebbels, Nazi Germany’s Minister of Propaganda.
Is there a bigger lie in today’s society than the one that says our business leaders deserve huge salaries as a reward for their efforts? Managers’ salaries are back in the news with the announcement that the income of Chief Executives in Britain’s top 100 companies went up by 49% in the last year. Coming on top of the astronomical rewards that continue to be received by the bankers whose companies got us into the current economic mess, the inevitable question is asked, are these bosses worth it?
This is not to do with ‘envy’, as the defenders of greed often suggest. I certainly have no objection to rewarding people who add value to their organisations. The trouble is, they don’t, according a report by the High Pay Commission. In the years 2000-2010 (before this year’s increases), the average bonus for the boss of a FTSE 350 company has risen by 187% despite the average year end share price going down by 71%. Looked at in another way, from a base of 100 in 2000, earnings have gone up to 224.1 while the value of companies has gone up to 108.2.
Deborah Hargreaves, chair of the HPC, said, ‘There has been a massive growth in what has been termed as performance related pay, yet no such corresponding leap forward in company performance.’ The argument that we need to pay high salaries or risk losing our best managers seems pretty empty when you realise they’re not even that good.
We might simply say more fool these companies if they pay ridiculous money to their managers. The problem is the effect on the rest of the economy. For a start, business salaries are used to set the pay of managers in the public sector. Worse still, if the gap between the rich and the rest grows, the sense of ‘them and us’ is greatly increased. And that’s bad for productivity.
When I was at Southampton General Hospital for a blood test recently, I picked up a union leaflet complaining that while staff were suffering a pay freeze, the chief executive’s annual salary had just been increased by 10.5% to over £200,000. Few of us object if we feel that we’re all in this together but the resentment is huge when staff feel they are making sacrifices while the bosses get richer.
A large income gap is divisive in other ways. The better off are increasingly separated from the rest- they live in their own communities, go to private hospitals and keep fit in private gyms. The gap between rich and poor is now the widest for 40 years. In the days when the gap was not so great, partly because top salaries were still in contact with the average and partly because higher taxes evened things out, we mixed more and shared more experiences.
Does this matter? If we want to have a society that works together for our mutual benefit, it does. If we want businesses to prosper, it does. John Lewis is our most successful retailer, yet, as I understand it, its chief executive earns no more than 20 times the lowest paid staff member and everyone gets the same percentage bonus. By contrast, those 100 top CEOs are earning 113 times the national average salary in the private sector. Another strange aspect of top bosses’ earnings is that 90% is in the form of a bonus. Let’s put aside the thought that, given the poor performance of their companies, their targets must have been so low that the phrase ‘shooting fish in a barrel’ comes to mind. More to the point is why the boss of the company is apparently so lazy and lacking in commitment that he or she needs an incentive to work hard and produce results? No boss of a small business needs such an extrinsic reward simply to do their best.
I am totally in favour of managers with the skills and experience to make a big difference to results getting a bigger piece of the cake. What we business leaders mustn’t forget, though, is that all employees contribute to results and if we want to get the best from everybody, we must not be greedy and overpay ourselves at their expense. Disproportionate salaries, extra bonuses and benefits, even special parking spaces, cause resentment and are a disincentive to commitment, co-operation and hard work.
Owners of small businesses, such as myself, tend to make sure their employees are properly paid first before giving ourselves a reward. But that's because we're more in touch with our staff.