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CEO Pay Is Up Again, Is It Time For An Excessive Pay Levy?

Two days and two very different pieces of news on the nation’s pay packets. Yesterday’s labour market bulletin showed real wage growth slowing yet again, piling more misery on the backend of a decade’s worth of stagnating wages. Today, however, good news for FTSE 100 CEOs, their pay surged 11% from 2016 to 2017, taking their annual salary to a lofty £3.9 million.

There is a clear sense of injustice here that cannot be separated from wider discussions of inequality. Proclamations of excessive fat-cattery regularly dominate the headlines and public debate. But this has not always been the case and looking to the past can help us understand the path forward.

“Do you mean that we should cap someone’s income? Not really, no. Why? What is the point?” The Labour Party has certainly come a long way since former Prime Minister Tony Blair ushered these words on the BBC in June 2001. “It’s not a burning ambition for me to make sure that David Beckham earns less money.” And, neither, in all honesty, was it much of a priority for anyone else.

Cut to sixteen years later, however, and the party’s manifesto for the 2017 general election includes a pledge to introduce an excessive pay levy on companies with staff on very high pay – 2.5% on employers for employees earning over £330,000 per annum and 5% for employees earning over £500,000. Part of a new ‘transformative’ agenda that sought to reduce inequality, boost living standards and bring about ‘real change’.

So how did the Labour Party get from A to B? How did inequality become a defining issue across the UK political landscape? What changed from Blair to Corbyn? The answer is everything, or nothing, depending on where you stand.

Today, the political rhetoric in the UK is often premised on decreasing or stagnant levels of inequality. Philip Hammond, Chancellor of the Exchequer, said at the last budget that “today, income inequality is at its lowest level in 30 years.” That misses, inadvertently or not, three important points. Firstly, he’s incorrect. There has been a slight increase in the Gini Coefficient after housing costs over the recent decade or so. Secondly, the Gini is a headline figure that glares over what is happening at the upper and low ends of the income distribution (relevant to the experience of the UK). Thirdly, inequality in the UK is already high enough (and has been for some time) to act as a drag on growth. Not least to mention inequality’s socially corrosive effects.

Yet campaigning around inequality remains politically fraught. Work conducted by The Australian National University and Oxfam GB has found that “in the UK information about inequality and mobility boosts support for redistribution among non-Conservative and non-Labour party voters, but has no effect on Conservative or Labour party voters.” That is to say your party political allegiance will prevent you from changing your mind on inequality.

I’ve seen this divide play out in meetings; representatives from ‘the right’ and ‘the left’ have fundamentally disagreed before we’ve pretty much started talking. Call this confirmation bias, ‘What You See Is All There Is’ or, more reductively, being stubborn, but there is a need to go beyond empiricism to win hearts and minds.

This worked for the Conservative party from 2010 to 2015. They went into two general elections plugging a lie that Labour caused the financial crisis; that government debt was a result of reckless overspending; that austerity measures were the only route to economic recovery. Their message resonated. Polling conducted for CLASS as recently as May 2018 showed that over half of all UK residents thought austerity measures implemented in 2010 were necessary.

However, come 2017, and with a leader of the Labour party that was offering a much more progressive manifesto than his predecessor, the political landscape of the UK had been transformed. Average weekly wages had been flat-lining or decreasing for the most part of a decade, public services had been decimated and there were signs of austerity fatigue among pretty much everyone. The shockwaves of the vote to leave the European Union, the high-profile collapse of Carillion and re-nationalisation of key infrastructure after private sector failure have posed more fundamental questions about the UK's model of capitalism.

Under this pressure from a resurgent left, Theresa May felt the need to rally to the defence of free-market capitalism in a speech late in 2017. “The greatest agent of collective human progress ever created”, she declared.  The Overton Window had suddenly lurched to a place in which it became possible to discuss ideas such as the excessive pay levy. Maybe extortionately high wages were not meritocratic after all. Maybe inequality is a problem.  Maybe government should play a bigger role in society.

Further still, these arguments are not without their academic backing. Thomas Piketty highlighted the rise of super-managers as a key determinant of rising inequality. An integral component of what he labelled ‘hyper-meritocratic society.’ Meanwhile Mariana Mazzucato’s work argues that neoclassical economics has conflated value with price to the extent that all income is earned income. Gone is the assessment of whether this income comes about through value creation or value extraction.

These debates crucially underpin any discussion of the excessive pay levy. In Mazzucato’s words, “in theory, no income may be judged too high, because in a market economy competition prevents anyone from earning more than he or she deserves.” In this light, to question excessively high incomes is to question the market itself.

Yet we know markets are imperfect. Analysis undertaken by Lancaster University Management School found little relationship between CEO performance, value creation and executive pay. They concluded that “the evidence suggests a material disconnect between pay and fundamental value generation.” Six years prior, The High Pay Commission, an independent inquiry into boardroom pay across the UK, had reached the conclusion that excessive high pay damages both the economy and society.

A new narrative on high incomes and wealth is thus slowly emerging. Polling shows that 39% of eligible voters ‘strongly’ back a 20:1 cap on the ratio between an employer’s highest and lowest-paid workers, while only 8% strongly opposed it. Yet work remains to be done. The annual Sunday Times Rich List, a list of Britain’s 1,000 wealthiest families and individuals, prematurely celebrated the rise of ‘self-made wealth’ despite the list being dominated by those who inherited wealth or work in industries that extract value from the rest of the economy.

Dismantling this idea of self-made wealth is part of the battle that is still to come. The agenda under Corbyn’s Labour is challenging these misconceptions and offering a genuine alternative to the current orthodoxy. Through contesting an ideology that presents all income as fair income, the excessive pay levy is part of this change. To repeat the oft-repeated, our basic function is “to develop alternative to existing policies, to keep them alive and available until the politically impossible becomes the politically inevitable.”