British business is its own worst enemy. The latest 10 per cent increase in top executive pay to an average of £5.5 million is another insult to the working population. These people seem to be under the L’Oreal delusion that “they’re worth it” – but few of their employees or economists agree. Executive pay in general bears very little relationship to company performance and seems to vary inversely with the performance of the wider economy.
Since the 2010 recession, FTSE top 100 pay has increased by a third as the economy has faltered. They now earn 140 times the pay of their employees which has been largely flat-lining since the recession. There is no rational basis for these differentials which seem merely to be following the earlier pay spiral in the financial services sector.
What is particularly galling is that these executives are not, on the whole, risk-taking venture capitalists, like Henry Ford or Elon Musk, who put their wealth on the line in the interest of creating new businesses with ground-breaking new technologies. They are a caste of mostly bureaucratic infighters and pole-climbers who spend their time cruising the boardrooms of big companies sitting on each other’s remuneration committees that award these inflated salaries. There’s even a name for them in business circles: the FUMOs (F*** Up and Move On).
Prime Minister Theresa May said only last month that there is an “irrational, unhealthy and growing gap” between what employees earn and their bosses. Even a Tory PM is beginning to realise this is damaging capitalism itself, not just shareholders who seem to have little control over the managements of the companies they nominally own. As the Chartered Institute of Personnel Directors has said, executive pay has a profoundly “demotivating” effect on the workforce in general.
This may seem unconvincing: why should it matter what top bosses earn any more than football stars? But like society, companies perform best when they are a moral community, where everyone feels they are involved in a worthwhile project. Otherwise you just have a dull, mechanical bureaucracy where everyone does as little as they can get away with and no one bothers to look for better ways of doing things.
Here’s a measure of where we have come. In January 1914 that archetypical capitalist Henry Ford, inventor of the modern production line, doubled his workers wages and shortened the working week. Yes doubled. Most businessmen today would see that as crazy since there was no particular labour shortage. But Ford saw things very differently. He wanted his workers to become consumers of his Model T cars. What better way to ensure the workers do their best than to have them buy the product they are making? And it worked: sales tripled and the company returned record profits.
That was a century ago, but Ford’s reasoning remains valid today, even though most of the work is now done by robots. The way to make capitalism work is to create engaged consumers who believe they are getting a fair deal and receiving the just rewards of their work. As Ford put it: “The owner, the employees and the buying public are all one and the same, and unless an industry can so manage itself as to keep wages high and prices low it destroys itself.”
He realised, as few seem to today, that machines aren’t consumers. Robots don’t buy cars – only people do.
On a societal scale we have seen in the past decade a return to a pre-modern version of capitalism where bosses see their job as keeping wages as low as possible while extracting as much value as they can in salaries and bonuses. Ford also realised business cannot function this way in a democracy, because eventually people will elect governments that call a halt to the party by increasing taxes to confiscatory levels.
This is why the Jeremy Corbyn phenomenon may not be just a bunch of superannuated Trotskyites taking control of the Labour Party. It is a symptom of the widespread disgust felt by voters at an economy run by people motivated purely by greed with no sense of social responsibility. And it isn’t going to go away as the middle classes increasingly find their living standards in decline as top management seizes the rewards of society.
If the bosses had half a brain they’d start thinking about redistribution. Instead, they’re digging their own graves.