More transparency on pay will benefit workers

Sometimes a policy only seems feeble because we are looking at it backwards, like peering into the wrong end of a telescope. Britain shrugged last week, for example, when the government said it would force companies to publish the ratio between the chief executive's pay and that of the average worker.

It is not that people think the policy is pointless. It should make remuneration committees squirm, they say. It might nudge them to consider the chief executive's earnings in relation to the distribution of pay across the company. But it is hardly going to prompt them to cut chiefs' salaries. And it may invite un-illuminating comparisons: the investment bank that looks more virtuous than the supermarket, for instance, because average pay is higher in the former than the latter. The same arguments can be heard in the United States, where plans to implement similar rules were recently put in limbo by the Securities and Exchange Commission (SEC).

But a ratio is made of two numbers and we have been dwelling on the wrong one. The policy's real impact may not be to deflate the pay of the chief executive, but to inflate the pay of everyone else.

For the first time, this policy should hand millions of employees a powerful nugget of information: the average salary in their company. (Even if the employer only publishes the ratio, staff who know their chief executive's pay will be able to work out the rest.)

The US has chosen the median as its average of choice (Britain has not yet specified). So by definition, half the staff in each company will discover they are paid below it. Some will be neither surprised nor unhappy. But plenty will be both.

The popularity of sites such as Glassdoor, where employees share salary information, has already given employers a taste of what happens next. "Either they become disengaged and disappointed and look for jobs where they'll be paid more," said Mr Brian Kropp, HR practice leader at the consultancy CEB, "or they ask for raises to get paid at the median or above."

Of course employers do not have to hand out pay rises. But they do seem worried about what will happen when this information hits the workforce. "The CEO pay ratio rule will cause internal discord among employees," the US Business Roundtable, a group of chief executives, wrote this year in a letter to the SEC. The policy will create "a new metric - median employee compensation - that invites employees and others to compare individual compensation figures within and across companies without sufficient context or relevant market-based factors".

If anyone should know the power of comparing one's pay with others, it is chief executives. Remuneration committees and consultants regularly benchmark their compensation packages against peers at other companies. And the median holds a lot of sway.

"Many boards target paying above the median," Britain's Institute of Directors wrote in evidence recently to a parliamentary committee inquiry into executive pay. "Combined with increased transparency on pay, this naturally leads to an increase in pay as companies compete with each other to remain above the average." Ms Amra Balic, head of the investment stewardship team in Europe for BlackRock, the world's biggest asset manager, said this habit of "chasing the median" was "one of the key reasons why we see pay increases year on year".

Chief executives have benefited from this inflationary side effect of transparency for years. But in many companies, pay below the C-suite has remained opaque.

Mr Tom Gosling, a partner at PwC, predicts the effect of transparency hitting the broader workforce will be "subtle". Ordinary employees will hardly have the bargaining power of chief executives, even if armed with more information than before.

Nor do we know how many staff will be bold enough to ask for more money. In Japan, Germany, Britain and the US, workers have been remarkably willing to settle for meagre pay rises in recent years in spite of low unemployment. They also seem reluctant to move for a better job. Economists are baffled and concerned by their quiescence.

A small dollop of pay transparency is hardly going to fix all the problems that have led to weak wage growth. But it would not hurt. Individual companies might not enjoy it, but the economy would benefit from some newly emboldened workers who can push pay a little higher. Chief executives have "chased the median" for long enough. It is time for their staff to have a go.

FINANCIAL TIMES

A version of this article appeared in the print edition of The Straits Times on September 07, 2017, with the headline 'More transparency on pay will benefit workers'. Print Edition | Subscribe