Why we must shine a light on pay ratios in the food sector

The gap between the highest and lowest paid employees is huge and getting bigger. There is no good reason why this should be the case – and there is growing momentum now, across the whole economy, for ‘pay ratios’ to be published and narrowed. It is in everyone’s interests – not just the badly paid, but also employers and investors – to have a well rewarded, satisfied and motivated workforce in the food sector. Narrower pay ratios can help achieve this, and they can also help food companies to demonstrate their commitment as responsible employers.

Pay ratios are a way of describing how financial rewards for work are distributed within companies. They compare the total pay of the highest paid person with that of an average worker in the same company, expressing the difference as a ratio. Surprisingly, calculating pay ratios is still a relatively new idea, so there is no standard formula, but a number of organisations have suggested credible methods. They key thing for now is to be transparent and consistent in the methods used.

Across the economy as a whole, pay ratios are widening. According to the thinktank the High Pay Centre, in 1988 the average FTSE 100 CEO was paid 47 times more than the average employee, whereas by 2015 the multiple had risen to 130 times.[i] By lunchtime on 4 January 2017, Britain’s highest-paid earners had already earned as much (£28,200) as the typical worker will earn in the whole year.[ii] Meanwhile the real wages of the median worker, which grew by around 2% a year from 1980 till the early 2000s, have fallen by around 10% since the crash of 2008.[iii]

High pay in the food sector is almost never discussed. In fact there seems to be an (erroneous) perception that not many people make much money out of the food supply.  This is belied by the information available in company reports. At the UK’s largest food retailer, Tesco, for example, the Chief Executive, Philip Clark, earned £1.6 million in 2014, and the non-executive chairman, Sir Richard Broadbent, was paid £706,000.[iv] The prevalence of high executive salaries, coupled with the reality that many of the lowest earners in the workforce are to be found in farms, food factories or retail and catering outlets, explains the food sector’s extremely wide pay ratios. In the High Pay Centre’s 2014 rankings, there were five food and beverage companies in the 10 companies with the widest pay disparities. Third in the overall list was the catering group Compass, where the CEO, Richard Cousins, earned £5.5 million. Average earnings at the company were £13,248, making a pay ratio of 418:1[v], or more than three times the FTSE average. (The other food and drink companies in the top 10 were Whitbread, SAB Miller, Associated British Foods and Unilever.)

The reasons for persistent high pay levels and wide pay ratios are harder to pin down than you would think. Firstly, the evidence on many fronts suggests that flatter pay structures lead to higher levels of wellbeing across societies and within companies. In absolute terms, there is evidence that increasing wealth does not bring ever-higher wellbeing: beyond a certain point, wellbeing levels off.[vi] Individually, highly paid people often say that financial reward is not their main motivation or source of satisfaction,[vii] and even feel guilty about earning so much.[viii] It is also argued that high executive pay does not correlate with strong company performance,[ix] and indeed is linked to poor performance.[x] High executive pay, in absolute terms and relative to average earnings, has been found to demotivate workers and undermine social trust in business.[xi] There is strong evidence that inequality per se is socially corrosive, undermining the prosperity and health of all members of unequal societies, not just the poorest.[xii] And it has been shown that reducing inequality does not make countries poorer.[xiii]

All of these arguments have given rise to a small but growing movement in favour of the publication of pay ratios, ideally as part of standard company reporting procedures. Those calling for publication have included the Hutton Review of Fair Pay,[xiv] the High Pay Centre,^[xv] the NGO Pay Compare (which publishes pay ratios that have been calculated by companies themselves, mainly in the public sector),[xvi] the NGO Wagemark (which is trying to establish accreditation for companies meeting a ratio of 8:1 or lower)[xvii], a Working Group on Executive Remuneration set up in 2015 by British business leaders,^[xviii] and the investment management group LGIM.^[xix] It is argued that publishing pay ratios would improve transparency, highlight pay disparities, substantiate arguments for fairer pay, exert downward pressure on ratios, and catalyse change towards more equitable pay structures. The director of the High Pay Centre, Stefan Stern, went further, saying publication ‘Could help bring back at least a modicum of shame or embarrassment into our boardrooms. This would be a healthy development’.[xx]

These calls for specific action on pay ratios come amid mounting political concern over unequal and divided societies. Both the UK’s vote to leave the EU and the election of Donald Trump in the USA were said by some to be symptoms a ‘populist’ surge fuelled, in part, by the resentment of working people against a self-serving and self-enriching elite. Responding to this mood, the Prime Minister, Theresa May, said in September 2016 that she would like fairness to underpin her programme for government, and singled out pay disparities for attention, saying: ‘If you’re a boss who earns a fortune but doesn’t look after your staff … I’m putting you on warning.’[xxi]

In the food sector, a final consideration is that low wages are often justified on the grounds that raising them would put up food prices.[xxii] The corollary argument is never made – that by reducing high pay levels, financial rewards might be redistributed, so that low wage levels could be raised without price inflation. Or furthermore, that with the food and farming sector the single largest employer in the country, that higher wages would make any potential price increases easier to manage.

It is important to stress that publishing pay rations does not mean publishing individual salaries or in any way disclosing confidential information (the figures for individuals quoted above are taken from the Annual Reports that companies are legally required to produce. But all companies collect the information needed and make it available to their accountants – who in turn could calculate the ratios and include them in the reports. The trouble is – they don’t. And the information that enables others to calculate the ratios tends to be buried in small print in technical sections near the back of Annual Reports. Sustain believes it is time to shine some light into this murky area. Watch this space.

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