A rise in long-term incentives has meant that directors at FTSE 100 companies earned 21% more in the last financial year, a report has found. The study by employment research specialists Incomes Data Services (IDS) found that average annual earnings for directors was £2.43m, with chief executives picking up £3.34m.
IDS said that earnings pegged to long-term incentive plans, which include share options, rose by 44% and bonuses were up 14% in 2013/14. In contrast, basic salaries gained 2.5% over the period.
These figures highlight attempts, in the wake of the financial crisis, to end the potential for rewarding failure as share options are linked to long-term performance targets. But they still contrast sharply with levels of pay across the UK’s workforce, with official statistics showing a fall of 1.6% over the same 12 month period with annual pay growth, including bonuses, most recently being measured at just 0.6%. Since the 2010 general election the median total earnings for FTSE 100 chief executives has risen by 278% compared with 48% for full-time employees.
The solution to address the growing income gap is not to begrudge the high pay at the top, impose punitive taxes on high income earners, or increase the minimum wage levels, often the default options for the political classes and certainly for the labour unions’ policy advisors.
It should be acknowledged that low wages at the bottom are a drag on the public purse as the welfare bill for in-work benefits in the UK is huge. The UK firms tend to pay poorly compared their counterparts in other countries as the businesses here have grown accustomed to rely on welfare state’s benefit subsidies to low paid workers to get away by paying low wages. An increase in the minimum wage is often justified on the basis that it would end the indirect tax-payer funded subsidies to businesses. A rise in the minimum wage, however, is not a magic pill that would solve the increasing income inequality overnight. Higher wages would have an impact on employment levels and some businesses, especially small to medium enterprises, could struggle with increased wage bills.
It would be a mistake to apportion all the blame for low wages on to the businesses. The fundamental problem is that the British workforce does not possess the requisite skills to justify higher wages. Employers frequently complain that workers lack the requisite literacy and numeracy, and they do not possess the social skills needed to work in an economy that is increasingly dominated by the service sector. This skills shortage is also a major factor for demand for more highly qualified immigrant labour.
Efforts to manage boardroom greed are being addressed through remuneration committees and new rules that come into effect this month require that companies include a single total pay figure for top executives and binding shareholder votes on boardroom remuneration packages.
The serious policy problems and mistakes do not lie at the top but at bottom of the labour market. The only sustainable solution to reduce the growing income gap is to increase skills levels of the workforce that would merit higher pay awards. The UK does not have a credible “vocational” education policy in contrast to some of our continental counterparts. Germany, in particular, has a long-established system of apprenticeships and vocational colleges that we lack. The 1944 Butler Education Act was supposed to create a host of technical colleges but that policy was never implemented. If we are going to seriously address the growing wage gap then rising the skills level of the British workforce is the only viable, long-term solution.