Labour panned over proposed maximum earnings cap
There has been widespread criticism of calls from Labour leader Jeremy Corbyn for a cap on the earnings of top executives working for companies which want to do business with the public sector, after he suggested there could either be a ceiling on salaries, or the introduction of a fixed worker/executive pay ratio
11 Jan 2017
The proposals were outlined in a speech at Peterborough where Corbyn suggested limiting the salary of staff at companies with public sector deals to a £350,000 maximum.
Subsequently Corbyn said any cap would be set above his own salary of around £140,000 as leader of the opposition, or alternatively high earners would be restricted to a salary of no more than 20 times that of the lowest-paid employee.
Corbyn said: ‘In the 1920s, J.P. Morgan, the Wall Street banker limited salaries to 20 times that of junior employees. Another advocate of pay ratios was David Cameron. His government proposed a 20:1 pay ratio to limit sky-high pay in the public sector and now all salaries higher than £150,000 must be signed off by the Cabinet Office.
‘Labour will go further and extend that to any company that is awarded a government contract.
‘A 20:1 ratio means someone earning the living wage, just over £16,000 a year, would permit an executive to be earning nearly £350,000. It cannot be right that if companies are getting public money that that can be creamed off by a few at the top.’
In its response to the plans, the Institute of Directors said: ‘Businesses need to moderate their pay awards but a government pay cap is a blunt way to try do it.’
Mark Littlewood, director general at the Institute of Economic Affairs, said Corbyn’s ideas had moved from ‘misguided to simply muddled’ and branded the idea for a maximum wage cap as ‘dangerous and, for all intents and purposes, a 100% income tax rate’.
‘Pay ratios are sector discriminatory. A 20:1 ratio would have much less of an effect at a hedge fund than it would on a regular company, which is doubtful the intended consequence,’ Littlewood said. Sam Bowman, executive director of another think tank, the Adam Smith Institute, labelled a maximum salary cap ‘completely bananas’.
‘The strategic decisions that top bosses make affect every part of their firm, and multinational corporations are right to spend what it takes to attract the best business leaders to Britain.
‘If you're a worker for a FTSE 100 firm, this is bad news: your job security and wages will suffer if your company isn't led by the best people in the world. If you're saving for a pension, this is bad news: the value of your savings will suffer as British firms become less productive, starved of global top talent. If you rely on the NHS or other public services, this is bad news: tax revenues will fall as these highly-paid executives move abroad.’
The idea also failed to find favour with the High Pay Centre, which recently published research showing the average pay ratio between FTSE100 CEOs and the average total pay of their employees in 2015 was 129:1, while FTSE 100 chief executives clocked up the average worker’s salary within just two and a half working days in 2017.
Director Stephan Stern said that trying to pick one number as a pay maximum is hard to do, pointing out that ‘some people may genuinely be able to claim that they have helped create a lot of wealth and are entitled to a good share of it.’
‘In any case, if you set a rigid pay cap, well-paid advisers are going to find clever ways of getting round it. That is what has happened before,’ Stern said.
He argued in favour of requiring companies to publish their pay ratios between what the top executive earn and what the median employee receives, as a way of putting pressure on firms to explain and justify the pay gap.
‘It is quite hard to legislate effectively to force better behaviour from rich and powerful people. New rules can and do help, but ultimately a cultural shift is needed to make change stick. Business leaders and their shareholders need to recognise their shared responsibility to show restraint, and try to reverse the increase in inequality which has provoked so much anger and resentment in electorates around the world,’ Stern said.