Pay ratios aren’t that difficult

There has been plenty of speculation about what action Business Secretary Vince Cable may take in respect of executive pay. PIRC would like to encourage him to stick with the idea of pay ratio disclosure.

There are lots of sensible arguments for and against the disclosure of pay ratios. There are also some important technical issues to address. Should disclosure be of the ratio of chief executive to lowest earner, top earner to lowest (bear in mind that in some financial institutions the CEO may not be the highest paid), top to median, or some other measure? Should it just cover UK employees, or the global workforce? These are thorny problems, without doubt, for the Business Secretary to grapple with.

But the one argument that Cable should kill stone dead is the idea that the information disclosed would be meaningless and/or difficult to use. It is true, as some have argued, that investment banks may look like they have a ‘better’ ratio than supermarkets, because the latter have a large number of low-paid workers. But why would anyone compare an investment bank and a supermarket in the first place? On a whole range of issues that are analysed investors know they need to take account of factors such and industry sector, company size etc. Why would they do any different in respect of pay dispersion? It is a poor argument against greater transparency.

In reality, as with most reforms, we can’t really know what the impact will be until it is enacted. But if Cable is serious about tackling executive pay inflation, and the pay gap, he must beware the siren voices claiming a fairly minor extension of transparency in company reporting will result in meaningless information. To be blunt, this is what they always say, Vince.