Doesn’t your heart bleed for Jean-Pierre Garnier? The poor love has the misfortune to be CEO of one of the world’s biggest drugs companies, GlaxoSmithKline, and had a take-home package of just $10-million last year. Profits are down, the share price is down and the company’s hot-shot scientists are under pressure to come up with a new blockbuster drug. Clearly it’s time to bow to Garnier’s demands, which involve topping up his wedge with a $42-million package of free shares and options, so that he can keep himself motivated.
The shocking thing about the Garnier case is that it is no longer shocking. There may be a protest from shareholders, but Garnier will get his dosh. This is the way global markets work. Garnier, a Frenchman, is running a United Kingdom-registered company from Philadelphia. There is no expectation — none whatsoever — that the UK government might intervene to put an end to the troughing in the boardroom, because that might send the wrong message to the City of London. Government intervention is reserved for firefighters, who take seven years to earn what Garnier gobbles down in a week.
Yet the fact is that the explosion of top pay has made Britain a more unequal society than it has ever been. The gap between rich and poor has widened under the current ruling Labour Party, entirely because the already rich have become stupendously richer. Executives in Britain have taken their cue from the United States, where Garnier and his ilk have been living the life of Riley ever since Ronald Reagan tipped the balance of industrial power decisively in their favour. In 1965 American CEOs made 26 times more than a typical worker. In 2000 a CEO had to rub along on 310 times what the average worker was earning.
Even this underestimates the extent to which a small group of executives have been coining it. Writing in The New York Times, American economist Paul Krugman calculated that between 1970 and 1999 the average inflation-adjusted salary rose from $32 522 to $35 864 — an increase of around 10%. By comparison, the top 100 CEOs saw their real remuneration soar from $1,3-million to $37,5-million, more than 1000 times the pay of ordinary workers.
The justification for this widening gulf is that providing the right incentives for those at the top improves economic performance, with greater prosperity benefiting all. In the US growth and productivity picked up in the second half of the 1990s, although neither was as rapid as in the far more egalitarian 1950s and 1960s. Moreover, Paul Volcker, the former head of the US central bank, the Federal Reserve, believes the tendency to offer top executives part of their package in share options has given bosses an incentive to take short-term measures to ramp up the share price rather than look after a company’s long-term future. Britain’s top earners do not even have the American fig leaf to hide behind. Under Labour, there is no evidence of an increase in the economy’s underlying growth rate, and productivity performance has been abysmal.
The bifurcation of the labour market should come as no surprise, because market economies have an in-built tendency towards inequality. People are paid differently because some are more talented, some work harder, some start from more advantageous positions and some are luckier. Even starting with a wholly egalitarian system of income and wealth, it would not be long before the market turned equality into inequalities.
As the economist Lester Thurow has pointed out, there have been successful societies — ancient Egypt, imperial Rome, the Aztecs — that lasted for centuries with enormous inequalities. Massive income inequality does, however, sit uneasily with democracy. There is a conflict between the egalitarian notion of one person one vote and executives earning a thousand times more than their workers.
In practice, therefore, modern governments have tended to take steps to inject equality into market economies rather than face social unrest.
Welfare states, progressive income tax and state provision of education have been used to even out inequalities. The question now is whether governments are doing enough in a world that has turned the clock back to the days of the Great Gatsby.
Action has been taken at the bottom, where the earned income tax credit in the US was the blueprint for UK Finance Minister Gordon Brown’s help for the British working poor. Without these tax breaks, the gap between rich and poor would be even greater than it currently is. But whereas the former Iron Lady of British politics, the one-time Conservative prime minister Margaret Thatcher, used legislation to curb what she saw as excessive union power, the present Labour administration in the UK has left it to the pigs to clean up the sty. What needs to happen is tougher regulation to prevent pension funds nodding through colossal awards, plus a ditching of Labour’s moratorium on raising the top rate of tax.
Otherwise, Britain is on course to end two terms of a Labour government with a greater degree of inequality than it had after 18 years of the Conservatives. Not something for a social democratic party to be proud of. — (c) Guardian Newspapers 2002