Excessive pay for top bosses is holding back economic growth in Britain, the chief economist of the Bank of England, Andy Haldane, has warned, in a significant intervention in the debate about executive remuneration in the UK’s biggest companies.
Mr Haldane, who has earned a reputation as one of the central bank’s most radical minds, highlighted in a speech in Westminster the fact that FTSE 100 bosses are now paid 150 times the average UK worker.
This large and growing remuneration gap, Mr Haldane said, “drive[s] a wedge between management and employees…that in turn erodes social capital. A company, like a country, whose physical and social capital is being eroded is one whose wealth-creation capacity is being impaired.”
The intervention from a senior central banker on the vexed issue of remuneration levels for top bosses is likely to embolden reform-minded shareholder and asset management groups as they struggle to rein in executive pay at the country’s largest companies in what has been described as a new “shareholder spring”.
So far in 2016 there have been major pay revolts by shareholders at the oil giant BP, the mining group Anglo-American and the engineering company Weir, all over the level and structure of proposed remuneration packages to chief executives. A focal point of protest next month is expected to be the annual general meeting of the advertising conglomerate WPP where the annual pay of its chief executive and founder Sir Martin Sorrell is expected to soar to £70m.
Social capital refers to trust and relationships in a society and Mr Haldane argued this matters “every bit as much to wealth and well-being” as financial capital such as stocks and shares and other such assets.
“This is a telling intervention by one of the country's most highly regarded economists” said Stefan Stern of the High Pay Centre. “The damaging effect excessive pay at the top has on both businesses and the wider economy is increasingly being called out, and not before time”.
Mr Haldane, in a speech to the annual dinner of the reformist New City Agenda think tank, suggested the damage done to social capital by the bad behaviour of banks in the run-up up to the financial crisis was one of the reasons the economy’s recovery has been so disappointing by historical standards. “A lack of trust in finance potentially hobbles both economic growth and financial stability” he said. “Unaddressed, that jeopardises future wealth and well-being”.
Mr Haldane added that as well as loosening the social glue that enables the economy to run efficiently, high pay was likely to be hindering growth in a more direct way by crowding out investment by companies. “Monies paid out to executives are monies not being re-invested in the company, reducing investment in physical and human capital” he said.
But Mr Haldane, who is paid £215,627 a year by the Bank of England, was sceptical about the ability of shareholder groups, alone, to rein in top pay since their votes were often non-binding on managements. “With very few exceptions, no differences were made to executive compensation packages as a result of investor action” he said, referring to pay insurrections in recent years.
Instead, he suggested politicians should consider reforming the 2006 Companies Act, and requiring managements to place more weight on the interests of employees and customers alongside shareholders. “The shareholder-centric model may have become a recipe for depleting long-term company wealth-creation and, thus, societal well-being” he said.
Mr Haldane has raised concerns about the economically damaging effects of “short-termist” behaviour of private firms before. Last year he warned that firms seemed to be under-investing and paying excessive amounts of cash out to shareholders in the form of dividends. In 2012 he said the “Occupy” movement had been “right” in its diagnosis of the problems of the global financial system.
In another potentially significant intervention, Mr Haldane suggested that the Bank of England may need to “rethink” its current plans to require the banks to fund their balance sheets with more equity. Experts, including the former head of the Government’s Independent Banking Commission Sir John Vickers, have accused the Bank of undercooking its capital requirements on big UK lenders and thus potentially imperilling future financial stability.
“Academic challenge, challenge which causes policymakers to think, and possibly rethink, their calibration of prudential standards, is an essential ingredient of a healthy financial and regulatory system” he said. “The academic debate about prudential standards for banks is not closed; it has only just opened. And one of the Bank’s public policy responsibilities is to help nurture that policy challenge.”
By contrast the Bank’s Governor, Mark Carney, has repeatedly sought to reassure banks that there will be no further increase in regulatory capital demands made on them.
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