It has been widely reported that the latest British Social Attitudes Survey found that although three quarters of the British public think the gap between rich and poor is too wide, only 35% thought the Government should engage in redistribution.

This raises a question of how a progressive government could reduce the UK’s high, growing and unpopular levels of income inequality if the public distrusts tax-and-spend solutions.

There are two answers to that question. The first is to recognise that although the public may not be enthusiastic about redistribution in general, they do favour redistribution away from the top 1%. The majority of voters, including Conservatives, support the 50p top tax rate. The popular support for the idea of reversing the rocketing pre-tax levels of top pay has also been recognised in statements by Conservative, Labour and Liberal Democrat politicians.

But progressives should also recognise that inequality at the bottom end of the income scale can be tackled at the same time as seeking to reduce spending on benefits. This could be done by focusing on the huge cost to taxpayers and the wider economy of companies which pay their low-paid staff at such levels that substantial benefit subsidies are required to make ends meet.

The cost of in-work poverty is huge: The IFS estimates that sub-living wage pay costs taxpayers£6 billion each year. If we examine the wider taxpayer cost of in-work poverty, the picture is even bleaker: child poverty costs us £25 billion each year, even though 57% of children in poverty have working parents.

Politicians have been relatively quiet about the Living Wage recently (perhaps distracted by the staggering increases in top-end pay). This is a shame – there are certainly many more companies who can afford to pay a Living Wage than presently do so (we could start by looking at those who can afford to pay their senior staff unusually large amounts).

While some private sector companies pass the costs of their low pay policies onto taxpayers, some public sector employers are also complicit. For example, there is an increasing trend towards local authorities outsourcing services. It would be helpful if public sector employers published an assessment of the full taxpayer cost of major contracts, so that “taxpayer savings” can be scrutinised, to see if they are what they claim to be.

The below is a joint response to the BIS consultation on Narrative Reporting and discussion paper on Executive Remuneration, co-signed by One Society, Ekklesia, Church Action on Poverty and London Voluntary Service Council (LVSC).

One Society’s full responses can be found here.

Joint response to BIS consultation on Narrative Reporting and discussion paper on Executive Remuneration

Executive pay is a subject which has generated widespread attention in recent months and years. It is good that the Government is seeking views on how the setting and reporting of pay in the private sector can best meet the needs of companies and other stakeholders.

We are keen that the Government, companies and investors should consider the financial, economic and social impacts of pay levels across the workforce and not just those in the boardroom:

There is strong evidence that companies which ensure decent pay and conditions for workers at the bottom of the pay scale1 and moderate differentials between highest and lowest earners2 reap benefits in terms of performance (as well as PR).

The decreasing share of income going to those on low and middle incomes reduces the spending power of this group, which reduces the ability of the economy to recover3. In addition, pay that is below living wage levels creates a cost to taxpayers estimated at £6 billion per year4, not including the costs of income related social problems.

There are numerous health and social problems associated with low income and income inequality. These create costs which are borne by the economy and/or taxpayer.

As organisations which are concerned about the impacts of low incomes, we therefore urge the Government to adopt measures which will encourage companies to report on the differences between the pay of directors and employees and consider the views of employees in matters of pay.

Today we saw one of the most effective anti-capitalist PR stunts in recent memory. But this was not the work of the protesters camped around St Paul’s and Finsbury Square.

I refer to the data released today by Incomes Data Services, which showed that FTSE 100 directors had a 49% year-on year increase in total earnings.

As the BBC pointed out, this is well above the average pay settlements of 2.6% for private sector workers (i.e. average employee pay is falling in real terms, because CPI inflation now stands at 5.2%).

Nor is this a new phenomenon. The equivalent data last year (pdf) showed that FTSE directors’ total earnings were boosted by 55%.

These pay rises are bad for business and bad for the economy, not only because of the PR damage they unfortunately inflict on business in general, but because such high pay rises damage the performance of companies and the economy.

It is often asserted that high pay is necessary to motivate and retain top talent.

However, the facts simply do not back this up: ever-rising pay has not been matched by rises in company performance.

Numerous studies (and the financial crisis) show that stratospheric “incentives can result in a negative impact on overall performance”. The idea that executives will emigrate unless rewards continue to escalate is also unfounded:

“in the last five years only one FTSE 100 company has had its CEO poached by a rival, and that rival was also British”.

Remuneration practice in the UK over recent years sometimes appears to have been conducted in the (discredited) belief that directors are rare super-humans that need to be cherished and pampered, while the rest of us are mere human resources; however, studies (pdf) show:

“The bonus-driven rises in directors’ pay and the falls in employee’s real pay are not just an unfortunate coincidence. Directors can find themselves tempted to suppress wages in order to maximise the short-term profits on which their bonuses too often depend.Wide gaps between top and bottom pay within an organisation harm performance.”

Remuneration committees are also often guilty of such an obsessive focus on the pay and performance of directors that they neglect to “be sensitive to… pay and employment conditions elsewhere in the group” (as the Corporate Governance Code requires). Requiring businesses to report on the ratio between directors’ and employees’ pay and requiring employee representation on remuneration committees will help to counteract this temptation.

The Department of Business, Innovation and Skills is currently consulting about how executive pay is set and reported. This is a great opportunity for the government to put in place polices which ensure that corporate pay practices are in the best interests of companies and the economy, by recognising that the whole workforce, not just the board, are important for successful business.

Social mobility is certainly an important part of creating the meritocratic society successive governments have been trying to achieve. When only one in nine children with parents from low income backgrounds reach the top income quartile, but nearly half of those with parents from the top quartile stay put, social mobility is clearly a problem that must be tackled.

But Nick Clegg must realise this will have little effect if he doesn’t also work to tackle the underlying cause: the UK’s unusually-high levels of income inequality have a nasty tendency to prevent meritocracy, both sealing people out at the bottom, and sealing them in at the top.

At the bottom, escaping low pay is made highly challenging by the ‘low-pay, no-pay cycle’, which traps significant numbers of people in the kind of low paid, low-quality work that fails to provide the stability needed to make the transition to better-paid, higher-skilled jobs.

Low wages can also prevent young people having the sort of home life that encourages and supports ambition, by causing many parents to work such long hours that family life is damaged. Poverty and tensions in family life are clearly likely to have significant impacts on a child’s academic attainment, promote negative perceptions of work as a route to prosperity, and prevent families from acquiring the necessary savings to fund training or enterprise .

At the top, people are similarly “sealed off”, but for the opposite reasons. The wealthy are able to buy their children the tickets to success (including schooling and savings) and have the right contacts to help them along the way.

Nick Clegg has correctly identified some of the levers by which the children of the affluent monopolise career opportunities (internships being the most obvious example), but unless the effect of income gaps in cutting off the top and bottom from the rest of society are addressed, there will always be tickets to success that are hoarded by some and unknown to others.

As an IFS study pointed out it is:

“…likely to be very hard to increase social mobility without tackling inequality.”

This government does have opportunities to reverse the growing income gap. Vince Cable tackling the growing pay ratios could be one such opportunity; but Nick Clegg is likely to find that efforts to increase social mobility will have very marginal effects unless its causes are addressed.

Vince Cable’s speech at the Liberal Democrat conference could be criticised for making points of principle but lacking firm commitments. Unfortunately, these points of principle still need to be made and it is a positive thing that politicians are taking the issue of excessive pay and wage inequality seriously, despite opposition from influential organisations.

Miles Templeton, head of the Institute of Directors, is a case in point. His comment on the speech was that it’s “daft” to be talking about curbing executive pay, hoping that it’s just “conference rhetoric” because it isn’t something that would help the UK economy.

It is a sad irony that many of those who argue reducing CEO pay would threaten the economy also insist that raising low pay would do the same.

In reality, there is increasing recognition that that reducing inequalities of income and rebuilding the economy go hand in hand, especially if one recognises that people other than CEOs create wealth, and that they need to be properly rewarded too.

There is widespread concern that growing pay inequality is linked to increased economic volatility, with low income households forced to increase debt levels, high pay and bonuses creating a climate of short-termist risk-taking, and stagnation of pay at a lower level reducing consumption and risking stalling economic recovery in the UK.

So it is good Cable reiterated that whilst “there is absolutely nothing wrong with generous rewards for those who build up successful businesses and create wealth and jobs”, there is a problem with:

“…executive pay which, in many cases, has lost any connection with the value of shares, let alone average employee pay.”

On a less abstract level, there are also positive signs. Vince Cable stated his intention to continue consultations on strengthening the link between pay and performance, and implied an intention to make shareholder votes on remuneration committees binding. He also talked about making details of pay within private companies more transparent, both to shareholders and the public.

We will have to wait for the details. It is disappointing so little was said about Cable’s previously stated suggestion that employees could sit on remuneration committees, and that the focus of the speech was on the weak link of high pay to company performance, rather than the negative effects of high ratios on the wider economy, and on individual companies.

Unrestrained greed, and the inequalities it creates, are not only unacceptable, but are an inefficient way of running our society and economy.

We hope those ideas will emerge from the consultations, and that Cable’s willingness to take on assertions about the principle of fair pay will also lead him to take on those who assert the solutions – such as pay ratio reporting and broadening the membership of remuneration committees – are also dangerous or unnecessary.