High Pay Commission’s transparency blind spot

Copy of the Cruikshank drawing from Charles Di...

Could we be going back to this?! Image via Wikipedia

“By 2035 the top 0.1% will take home 14% of the national income. Equivalent to that seen in Victorian England.” So proclaims the final report of the High Pay Commission, which was set up to look at the inequality in pay in the UK and what to do about it. They had to do a bit of extrapolating at both ends to come up with this conclusion, as they only had data from 1913 to 2007, and the Victorian era ended in 1901. But subsequent eras such as the Edwardian era and World War 1 have less of a whiff of the workhouse and Oliver Twist about them, so you can see why the Commission were keen to stretch the data out a bit.

The pedant in me is slightly annoyed by this example of engineering, the lack of clarity on whether they have taken tax into account or not, and the mis-spelling of “Dan Ariely” as “Dan Ariel”. But these are, perhaps, relatively minor quibbles. There is plenty of other data out there which points to the fact that those at the top are seeing their pay grow at a faster rate than those lower down. And anyway, the Commission’s data engineering allowed me to start my blog post with a gratifyingly dramatic quote, so I won’t complain too much.

The report contains some very interesting ideas and possible solutions, including placing employees on remuneration committees, shareholder voting on remuneration arrangements for up to three years ahead, and publicly advertising non-executive positions. But the report provides less credible justification for some measures, which I put down to two reasons. Firstly, it does not contain a thorough enough analysis of why there is a growing gap in pay, what has or hasn’t worked in past, and what this means for what needs to be done, including a proper discussion of different options. For example, there is no discussion of the idea that middle-skill jobs are becoming less important with improvements in technology, and all the ramifications this has for the salary that people lower down in organisations can demand. Secondly, as with so many policy thinkers, there is a tendency to idolise transparency, without considering what type of transparency is needed and why.

This perhaps partly explains how the commission have ended up with the recommendation to “publish the top ten executive pay packages outside the boardroom”. Clearly, there is an apparent contradiction here with one of the report’s explanation for rises in executive pay, the ratchet effect, whereby benchmarking of executive salaries leads companies to continually attempt to pay above average. How do we know that publishing the top ten executive pay packages outside the boardroom won’t lead to the same result, but with a slightly larger group at the top heading off into the stratosphere instead? The report does not provide any reasoning to explain why its other recommendations might outweigh this effect.

What would happen, I wonder, if there was increased transparency all the way down an organisation? At specific skill levels, this might reduce discrepancies in pay, perhaps with some ratcheting up in the short-term for those who were previously under-paid. But the ratcheting could not continue over the long-term, at all skill levels, without seriously affecting the competitiveness of a firm. No doubt, there would be upward pressure on pay in some areas, but these would tend to be areas where there is high demand for certain types of skills, relative to supply. These areas wouldn’t necessarily be at executive board level:  they could be for researchers with specialist knowledge, economists maybe (I think hopefully).

Only being a five minute economist, I don’t have the time to fully research this question. But please do let me know if you have seen any interesting research on the effects of different types of pay transparency measures in firms. 

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