Pay Differentials and Relationships

Michael Schluter, December 2006

Tesco’s chief executive just had a 25 per cent pay rise. He now gets nearly 4 million a year. This is about 300 times what his lowest paid employee gets, according to the 2005/6 Annual Report. That is what the market dictates, so surely it must be right? But is it? Think for a moment about the implications. A person’s pay tells us something about what we feel that a person is worth.

While we would all accept that strict equality of pay is not a reasonable goal – as some trained for longer and were not paid for that time, and some have more difficult, demanding or dangerous jobs – nevertheless, is it right to expect that one person is paid less than 1 per cent of what another person earns? It may not bother you if you are at the top end, but what about if you are at the bottom? Does it matter that over the last ten years salaries of leading executives of the top 100 companies have been rising at six times the rate of those of average employees? Surely differentials of 300:1, or even just 100:1, raise an issue of justice.

What has happened?

The Navy used to hold to the principle of a maximum differential between the top Admiral and the lowest paid seaman of 10:1. The John Lewis Partnership used to insist on 25:1 between the chairman and the lowest paid shop assistant. So why have pay differentials increased so much across the board, and why has the gap between the richest and the poorest in Britain, and in the global economy, increased to a yawning gulf?

The reasons of course are complex. In part the issue is simply organisational size. Companies have grown so much larger in the last 60 years, partly because Western societies are richer therefore people have more money to spend, partly because markets are now global, and partly due to the way financial markets operate. The ease with which companies can borrow money against the security of their assets makes it tempting for ambitious managers to buy up other companies to increase market power. With bigger companies, there are more layers of management and the stakes are higher, so top managers’ pay levels rise and the differentials widen.

Another reason why company directors have been able to increase their pay to such a large extent is the absence of effective accountability from shareholders. This is partly because many capital providers (like you and me) invest via pension companies. ‘Fund managers’ then invest our money into various companies to maximise returns. The problem is that too often you and I have no idea into which companies our money has been placed, and the pension companies too often take little or no action on behalf of their policyholders.

What can be done?

At one level, then, we are all responsible for widening pay differentials. Our system is based too much on debt finance, which the Bible has warned us to avoid. And yes, directors are overpaying themselves, but doesn’t this simply reflect the spirit of greed present in the wider culture of which we are all a part? In addition, most of us are putting our money into pension policies, with no realistic potential to exercise our responsibility for how and where the money is used. This is an area crying out for reform.

So what can be done? Companies could be required, for example, to record pay differentials in their annual reports. A condition of shareholders being granted the privilege of limited liability could be that their company supports ‘social sustainability’ by keeping maximum pay differentials to, say, 25:1. Companies could be incentivised, by a graduated corporation tax, to divest, reducing layers of management and thus reducing maximum pay levels. And new ethical pension funds could place a cap on pay differentials as a criteria for ethical investment.

Why does it matter?

But why bother? Because relationships matter. Jack Jones, the Trade Union leader, used to say that there has never been a strike about pay – only about pay differentials. In some cases, employees may just be grateful that a top quality CEO comes to save the company. In many other cases, like the rail companies, directors’ pay increases cause anger and resentment. Social harmony (shalom) is often damaged.

The biblical principle most relevant to a Christian response to this issue, I believe, is that our equality before God as human beings made in his image should be expressed in a degree of ‘parity’ in social relationships. Without parity it is difficult to have open conversations; the less powerful will find it hard to be honest about how they feel. Without parity communities can be polarised as the wealthy use their clout to influence decisions in their favour or segregate themselves through separate housing, schools, shops or health provision. Too often crime is legitimised in the minds of the worse off by their relative poverty, and violence by their sense of helpless frustration.

Where wealthy families demonstrate in an active and committed way their concern for the disadvantaged, this mitigates the worst effects of wealth differences. However, generally, pay differentials have the effect of eroding mutual trust, the glue which holds society together. As Jesus warned: ‘a city or household divided against itself will not stand’. (Matthew 12:25).

 

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Category: News and Reviews

December, 2006

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