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Coffee House

Yes, pay of the one per cent is unfair. But worse: it’s rational

26 July 2013

1:11 AM

26 July 2013

1:11 AM

You don’t have to be a socialist to be alarmed at the way executive pay is, once again, spinning into the stratosphere. Did the head of Burberry really need £16 million? And the head of Nationwide £2.6 million? It fit a trend: the average FTSE100 chief executive salaries are rising again – by about 10pc according to the latest figures – and we can expect a repeat of the old debate about the high pay being a problem that needs to be tackled. This is a dangerous distraction for anyone seriously interested in helping the poor, as I argue in my Telegraph column today.

The problem of high executive pay is actually worse than it first appears. If it were a simple case of plunder or back-scratching, it could be ironed out with a few investigations. Shareholders don’t want to pay a penny more than they have to – and if they were being conned by remuneration committees who had grown too close to the people whose pay they were supposed to be monitoring, then this could be ended quickly. But if you look at privately-owned companies – where the people writing the paychecks are putting up their own money – the pay is, if anything, larger. A Chicago University study showed this trend is everywhere: lawyers, architects, sportsmen, engineers: the pay for those at the top is spinning away from everyone else. The bankers are just the most visible part of an unseemly trend.

It’s all down to scale. In a recent paper, Harvard’s Greg Mankiw put it well (pdf): companies have grown so large that the difference between being run badly or run well is measured in billions. A chief executive capable of making that difference is paid in millions. The size of these companies drives up salaries, because people can now leverage their talents on a global scale. Same goes for the world’s best architects, lawyers, computer programmers and engineers. If JK Rowling can sell books from Jakarta to Jedborough, then can we begrudge her riches? And new pen names? If a singer makes tens of millions because tens of millions around the world want to buy her records, is that an outrage? The FTSE100 is now largely a global index, with executives applying their talents over borders. The same rules apply to these far-less-glamorous people.

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That doesn’t make it any less jarring: seven-figure pay offends a basic sense of justice, especially at a time when so many have it so hard. So what to do? Every inquiry into high pay hits the same buffer: in a free society, there’s not much you can do to control what people pay each other. No matter how crazy you think it is, or how sickening the sums. You can intervene with the tax system once they are paid, and make things fairer that way. If they’re earning superbucks, then they should pay superbucks in tax.

In Britain, the top 1pc pay 30pc of income tax: a record high. And the lower-paid half of workers will this year be asked to contribute less than 10pc of income tax. A record low. This strikes me as being fair.

The rich may be deeply annoying, but it’s hard to argue that they actually harm society. Not a penny of the UK government deficit was caused by bank bailouts, for example. It’s also hard to argue that the pension funds (who control votes on pay) are being conned by greedy chief execs – especially if top pay rises when the companies go private.  JK Rowling and Burberry’s Angela Ahrendts are producing things the whole world wants to buy, so they deserve the rewards. Nowadays, those rewards come bigger than ever. They are not stealing the money, any more than the directors of Nationwide (who oversaw such jump in profits) were stealing their salary. The fact of it is that these people get paid the stupefying sums because they’re worth it. At least according to the cold metrics used by people who set their salaries.

Some on the right think this doesn’t matter, and that you should be relaxed about people get filthy rich as long as they pay their taxes. I do mind this: there is something outrageously offensive about the sheer inequality, the increasing social bifurcation and the way our society seems to be coming apart more broadly. It’s bad, getting worse and there’s no point pretending this is a blip of corporate greed that will soon pass. There are solid, rational reasons behind pay soaring at the very top – so this phenomenon will be with us for some time to come. But no government anywhere has helped the poor by railing against the rich. The task is of government is to run a fair tax system. Even Gordon Brown understood this: it was precisely his hunger for tax revenues that made pin the top rate of tax to 40 per cent. He viewed the rich as worms, necessary to till the soil.

Tolerating the rich is the price paid by those who seriously want to help the poor – and the latter is what government ought to be all about.

 

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