Finance

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

Theresa May wants companies to publish the ratio between the pay of CEOs and workers. Unless an emboldened Republican Congress overturns Dodd-Frank, U.S. companies might have to do the same.

Britain's prime minister would also like shareholders to hold binding yearly votes on the bafflingly complicated bonuses and long-term incentive plans that swell the pay of bosses.

The response hasn't been effusive: ratios are misleading and difficult to compile, companies say, while some British corporate leaders argue that yearly pay votes would make it hard to recruit the brightest and the best (you know, people like them.)

Reality Gap
The ratio of CEO earnings compared to the average employee has widened considerably
Source: Manifest, High Pay Cente

But having already backed down from putting workers on boards, May should hold her ground here. Politically, it makes sense. Brits discovered this week that they face the longest period of wage stagnation in at least 70 years. Real earnings in 2021 are on course to be below their level in 2008. Yet the average pay of a FTSE 100 CEO has increased by about one third over five years.

Pay Freeze
The period since the 2008 crisis has been terrible for U.K. wages
Source: ONS
nb. There were slight discontinuities in the ONS data in 2004, 2006 and 2011; we used the latest available for each.

There are few practical reasons to object, at least if the measures are introduced sensibly. Bosses say ratios are unfair because they make the leaders of companies with lots of low-paid staff, Tesco Plc say, look far worse than the heads of businesses where workers get fat salaries too, like Goldman Sachs Group Inc. 

But, as my colleague Chris Hughes has explored before, they're missing the point. Investors are savvy enough to understand this difference. The value of the ratio isn't in comparing different industries, but more in seeing how companies match up to peers: how does Tesco compare with Wal-Mart Stores Inc.? 

Pay Stretch
The larger increase in average pay suggests the very top CEOs are pulling ahead of their FTSE 100 peers
Source: High Pay Center

Yes, employees might need a bit more soothing, but that's part of the reason why companies have armies of (well-paid) public relations staff.

One thing they might want to avoid is the reason offered in Friday's report from the "Purposeful Company Taskforce," whose members include Andy Haldane, the Bank of England's top economist.

CEOs are different because they have a greater financial impact than, say, an ordinary store manager, the authors wrote. "As company size and complexity increases, it is logical [from a market perspective] for the pay of the CEO to increase, whereas that of ordinary workers should not," the report says, adding that since 1984 CEO pay has risen broadly in line with market caps.

Quite how this fits with the modern trend for staff empowerment isn't obvious. Plus, if company leaders really believe this to be true, why not use the yearly publication of a salary ratio as a chance to justify their special status? That would sharpen their own thinking around performance, and be a useful exercise for investors and workers.

In fairness, the authors of the report say they too want simpler pay structures, a fair pay charter, and a fuller picture on how executive rewards are linked to performance. They offer an alternative approach to yearly pay ratios, which looks at the difference over time rather than as a snapshot. That's all honorable. But without giving investors the power to hold executives to account over the most opaque parts of the package -- bonuses and incentives -- it would be hard to see this as more than a sop.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Bryant in Frankfurt at cbryant32@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net