Greek philosopher Plato mused that the best paid in society should not have an income of more than five times the lowest earners.
Today the picture is rather different.
The ratio between the pay of the average FTSE 100 boss and that of the average worker rose to 149 times last year, compared with just 47 times in 1998 and 120 times in 2009, according to figures from the High Pay Centre and Manifest.
For some industry figures and analysts, this is a worrying development that is undermining economic performance and causing resentment among workers, who feel executive rewards are disproportionate and unfair.
The widest gap among FTSE 100 bosses is between WPP’s Sir Martin Sorrell and his staff. Sir Martin’s £42.9m salary is 810 times that of the advertising group’s average worker. Peter Long at Tui Travel is next with a salary of £13.3m, which is 433 times that of Tui’s average worker. Other high ratios are George Weston’s 421 times at Associated British Foods, Richard Cousins’ 416 times at Compass Group and Simon Wolfson’s 359 times at Next. The pay of the average worker is £22,000 a year.
Pay ratios are calculated by dividing total employee costs by total employees, which is not a perfect measure as the ratio tends to be higher at labour intensive companies — such as retailers — that employ a large number of part-time workers.
Next, for example, says it would be fairer to compare Mr Wolfson’s salary with full time workers, which would reduce its ratio to 212 times.
But, despite the anomalies, some investors and analysts say the ratios provide a guide to the growing gap between bosses’ remuneration and that of their staff.
“These figures are pretty astonishing,” says Luke Hildyard, deputy director at the High Pay Centre. “There is a danger that the growing differential between a chief executive’s earnings and those of the average worker is demoralising to staff …which then undermines company performance.”
Mr Hildyard has been critical of Sir Martin’s pay, which he says “creates division and resentment”.
Simon Walker, director-general of the Institute of Directors, says: “The level of pay that some bosses receive is one of the biggest single things that is damaging relations between them and their workers. Money needs to be reinvested in the business. Too much money going towards remuneration can be counter-productive.”
Mr Walker says excessive pay and short-term incentives for chief executives are among the reasons for the big fall in productivity in the UK. He says even so called long-term incentive plans, or LTIPs, are too short-term — usually paying out over a period of three years — to encourage sustained investment that is crucial to improve productivity.
In the UK, there has been a steep fall in productivity in the past 15 years. The latest figures show that productivity is almost 15 per cent below trend levels. Output per person employed in the UK has risen 0.4 per cent since 2007, which compares with rises in the US of 8.6 per cent and 2.4 per cent in France.
Mr Hildyard says companies should publish their pay ratios. Already plans are under way in the US to require businesses to disclose the ratio of their chief executive’s remuneration to the median of their employees.
Doing so in the UK would bolster reforms introduced in 2013 that require all companies to publish a single pay figure for each director in their annual reports.
Paul Hewitt, European business development manager at shareholder advisory group Manifest, says: “Pay ratios in annual reports would give more transparency, although the ratio for a supermarket will be higher than the ratio for a research intensive company.”
Some investors and industry figures stress that the best chief executives should be paid highly because it is their drive, personality and skill that has made the company a success.
Matthew Beesley, head of global equities at Henderson, says: “It is often the best chief executives who earn the most. Simon Wolfson at Next is a great example of this. As a long-term investor in Next, he has offered great shareholder value.”
Ratio of Sir Martin Sorrell’s pay to that of the average employee at WPP
Mark Boleat, policy chairman at the City of London Corporation, says: “ Sir Martin Sorrell is earning a huge amount, but it is performance based. António Horta-Osório has turned round Lloyds, which is why he is highly paid. This is the market working.”
WPP stresses the performance based aspect of Sir Martin’s pay, saying that 84 per cent of his earnings arose from the five year co-investment scheme, which was approved by more than 80 per cent of the group’s shareholders in 2009. Next makes a similar point, saying that Mr Wolfson’s total £4.6m package includes £1.1m for the increase in the value in Next shares granted to him three years ago.
Associated British Foods and Compass also stress the performance element of their chief executives’ pay. ABF says the total pay package for Mr Weston reflected growth of the share price over the past three years, adding that his base pay increase was below the average rise of the group.
Compass says that since the appointment of Mr Cousins in 2006, total shareholder returns have risen more than 450 per cent.
“But, would Plato accept these justifications?” asks Mr Hildyard. “I don’t think he would. We feel that these rewards are so disproportionate that it is not good for society or the economy. One of the most important things for company success is staff morale, and excessive pay undermines morale.
“There needs to be a sense of fair play, particularly in Britain.”
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