In Vietnam, manufacturing workers on strike are a familiar sight. In March,
3,000 furniture company employees downed their staple guns over low pay, as
well as the prospect of a six-day working week and up to 1,000 hours of
enforced overtime each year.
Vietnamese manufacturing workers are the cheapest in the world, undercutting
even those of China, with an average annual wage of about $800 (£399), or
$15 a week.
In the United States, stratospheric executive pay packets are an equally
familiar sight. About half of the S&P 500’s top bosses took home more than
$8.3 million last year, but wages at the top end of the scale far
outstripped this figure.
The general perception is that the rich are becoming richer, while the poor
are simply staying poor.
Runaway wage inflation at the top end of the earnings scale is not replicated
at the bottom – and tensions over this mismatch are beginning to emerge.
Warren Buffett, the world’s third-richest man, fuelled the debate this week
when he publicly criticised the American tax system for allowing him to pay
a lower tax rate than his cleaner. Mr Buffett depicted a tax system geared
always to favour of the wealthy.
The sums at the centre of this new battle over pay inequality are huge. Last
year Terry Semel, the chairman and chief executive of Yahoo! at the time,
was the biggest earner in the US, with a total compensation package of $71.1
million. But even the ten top earners made $30 million each – equivalent to
a weekly salary of about $576,000.
No company in the UK equalled the largesse of Yahoo! last year, but the
constituents of Britain’s boardrooms did not go hungry. The total earnings
of FTSE 100 bosses jumped by more than 40 per cent on average to £2.89
million in the 12 months to July 2006, according to Incomes Data Services
(IDS).
The biggest earners were light years above this figure: Sir Martin Sorrell, of
WPP, received £17 million, Mick Davis, of Xstrata, took home £15.3 million,
and Bart Becht, of Reckitt Benckiser, was paid £13.6 million.
Workers saw no such leap in pay. Figures from Deloitte, the accountancy firm,
indicate that although executive directors at FTSE 350 companies received an
average pay rise of 6.8 per cent in 2006, the British workforce received an
increase of only 3.9 per cent.
This disparity in the rate of wage growth is nothing new. IDS research shows
that last year the leaders of Britain’s biggest companies earned 98 times as
much on average as their employees. That is more than double the difference
in 2000. Twenty years ago UK chief executives earned 25 times as much as the
average worker.
The pay gap is more glaring, and growing even more quickly, in the US where,
according to calculations by Associated Press, the average chief executive
made 179 times as much last year as rank-and-file workers. This compares
with a 90-to1 ratio in 1994.
Globalisation theorists say that the impoverished Vietnamese labourer is as
much to blame as the private jet-flying American chief executive for
worsening pay inequality in Britain and the US.
Martin Weale, director of the National Institute for Economic and Social
Research, says that free trade in goods with countries such as China has had
the effect of depressing the wages of everyone who works on the manufacture
of goods on which China can compete. “English workers may be four times as
productive as Chinese workers, but if the wage rate in Britain is four and a
half times as high, it’s still cheaper to manufacture in China,” Mr Weale
says.
Displaced UK manufacturing workers have, in turn, moved into other sectors,
depressing wages across the board, according to globalists.
Meanwhile, at the other end of the scale, globalisation means that the
businesses led by UK chief executives are in competition with those of their
US counterparts, allowing bosses to argue that there is also a worldwide
jobs market for top executives. This, in theory, pushes wages up to the
highest common factor.
Others say that the forces behind the wage gap are much more complex.
Will Hutton, chief executive of The Work Foundation, will publish in January
an updated version of his book The Writing on the Wall, in which he argues
that a combination of weak corporate governance and rampant mergers and
acquisitions activity, rather than China, is to blame for rocketing
executive pay, which is the main cause for the growing wage gap.
Meanwhile, Mr Hutton says the fact that low pay is seen in industries that are
unaffected by imports, such as the services sector, means that the China
effect is not as strong as it is frequently portrayed.
“Don’t blame globalisation for low or high pay – it’s created at home,” he
says. “There simply isn’t an international market in CEOs sufficient to
drive the price rises we have seen.”
Mr Hutton says that the UK and the US have developed a business culture where
share price is the be-all and end-all. “Under desperately weak and
unreformed corporate governance arrangements, CEOs have in effect written
their own pay deals,” he says.
Mergers and acquisitions help to prop up share prices, allowing investors to
feel more comfortable about signing off monster pay deals.
Some institutional shareholders privately agree with this summation. An
important UK investor, who asked not to be named, points out that
remuneration committees are made up of company directors who work closely
with top executives and who have little interest in seeing executive pay
constrained.
Meanwhile, the investor says that it is difficult to find truly independent
pay consultants because few are willing to give up lucrative work consulting
for companies to focus on custom from shareholders.
“Plus, you rarely get all shareholders thinking the same way at the same time
about an issue, and a lot of investors are paid far more than directors and
feel uncomfortable about highlighting the issue,” the shareholder says.
While poor corporate governance is driving executives’ wages up, technology is
pushing employees’ wages down.
Jagdish Bhagwati, a professor at Columbia University and a senior fellow at
the Council on Foreign Relations, argues that recent technological advances
have been so rapid, the workforce has not been able to assimilate and move
on to new jobs as it has done in the past. Professor Bhagwati, who will
release an updated version of his book In Defence of Globalisation in
August, says that unskilled workers, on the run from encroaching computers,
are willing to accept lower and lower wages in whatever employment they can
find.
“Previously, there would be new jobs, as technology drives economic growth,
but technological change is [now] so steep that you can lay off entire
assembly lines, and before they can find other jobs, there have been more
such changes.”
Professor Bhagwati says that in the US the downward pressure on wages has been
exacerbated by the decline of the union movement: fewer than 10 per cent of
private sector employees are unionised.
There are a few harder-to-define forces thought to be at work on executive
pay. One is the winner-takes-all-society.
As with professional footballers and entertainers, the competition between
increasingly large and powerful companies to have what is seen as the best
chief executive (or player or singer) is pushing rewards farther upwards so
that pay is disproportionately heavy at the top of any professional ladder.
There is some research to support the theory. A study last year conducted by
Ian Dew-Becker and Robert Gordon for the National Bureau of Economic
Research in the US suggested that half of the country’s productivity gains
since 1966 had found their way into the salaries of the top 10 per cent of
earners. The other half filtered down to the bottom 90 per cent.
An aligned trend among companies to allow executives to battle it out to
become the superpaid superhero is also helping to force up pay.
Mark Bryan, a labour economist at the Institute for Social and Economic
Research, says: “There’s the superstar phenomenon – the idea of having
tournaments within organisations with a huge prize at the top.”
Two years ago, amid speculation about the retirement date of Lee Scott, its
chief executive, Wal-Mart Stores, the giant US retailer, set up its own
competition for the boss’s job. John Menzer, the head of Wal-Mart’s
international business, and Mike Duke, the head of the American business,
swapped jobs and both became vice-chairmen in what was seen as preparation
for them to vie for the chief executive’s position.
This year Marks & Spencer, Britain’s well-known retailer, was thought to be
lining up its own runners and riders to succeed Stuart Rose, its chief
executive, after a management reshuffle in which its retail director,
Anthony Thompson, left the company and Carl Leaver was appointed director of
the international business. Kate Bostock, the director of women’s and girls’
clothing, was promoted to oversee the lingerie division as well.
Whether the causes are globalisation, technology, poor corporate governance or
the superhero society, Bill Cohen, a remuneration specialist at Deloitte,
believes that the widening of the wage gap will slow in coming years – in
part because of headlines about executive pay.
“There’s more of a trend focusing on variable pay rather than base pay,” Mr
Cohen says. “And there’s significantly more attention being paid to the rise
in executive pay and whether that’s appropriate.”
