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Hot topic: Can pay be too high?

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A recent report by Incomes Data Services suggested FTSE 100 directors’ pay is now on average 120 times that of employees, up from 47 times higher in 2000. Should something be done to manage the levels of executive pay? In the first of our hot topic feature, Luke Hildyard, deputy director of High Pay Centre, gives his view.

Research from Incomes Data Services found that FTSE 100 directors’ pay increased by 21% over the past year, to an average of £2.4 million annually – about 120 times the average worker. 

The figures are so large that they become almost meaningless. But it is worth taking a moment to think about what such vast sums entail. You could reduce a £2.4 million income by almost 95% and the recipient would still be in the top 1% of all earners in the UK.

This raises a number of questions: are incomes 10 or 20 times the earnings of even those already considered very, very rich really necessary?Could more modest sums of money – hundreds of thousands of pounds, as opposed to millions – coupled with the prestige, responsibility and fulfilment of taking a leading role in a major company – not sufficiently reward and incentivise our business leaders? And would the sky really fall in on the UK economy if the government attempted to steer companies more forcefully in this direction?

Such large differences in pay, either within organisations or entire economies, are similarly perplexing. Is it possible for one single individual to be 120 times more important than another? It’s difficult to believe. Even those at the top taking the most important strategic decisions depend on advice from colleagues throughout the organisation, as well as the competence of all employees in executing strategy.

Just spending this kind of money is problematic. Nobody needs a house or car 120 times the size of somebody else (or 120 houses or cars of similar size). The main thing that these gargantuan pay awards achieve is not to stimulate business success, but to foster resentment and bitterness in those at the bottom; arrogance and misguided superiority in those at the top; and division and a complete breakdown of sympathy and understanding throughout.

For either a single organisation or an entire society, this is a recipe for disaster.

Luke Hildyard is deputy director of High Pay Centre

Check back tomorrow for the second of our hot topic viewpoints