The role played by large firms in generating income inequality: UK FTSE 100 pay practices in the late twentieth and early twenty-first centuries

Abstract

We examine the role of large firms in generating income inequality. Specifically, we consider the growth in the use of asset-based rewards for senior executives, combined with continued use of salaries and wages for other employees, and the impact this has on measures of inequality within firms. Our paper presents data on intra firm inequality from the UK FTSE 100 for the period 2000–2015. It looks at ratios of CEO to average earnings and attempts to explain both the growth in inequality on this measure and the extent of variance between firms. It distinguishes between a period of ‘administered inequality’ up to the early 1980s when intra-firm processes defined differential pay and a subsequent one of ‘outsourced inequality’, when capital market measures dominate executive pay. In the latter period, intra firm inequality measures are defined by upward movements in capital market measures and the extent of outsourcing of low paid work. We conclude by discussing a number of UK public policy proposals regarding executive pay.

Keywords:

• CEO compensation
• firms
• inequality
• pay ratios

Acknowledgements

We are grateful to participants at the LERA Chicago conference and University of California Irvine seminar series for comments on earlier versions of the paper.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Paul Willman is an Emeritus Professor of Management in the Department of Management at the London School of Economics and Political Sciences and Academic Director of LSE’s Executive Courses. He was previously the inaugural Ernest Button Professor of Management Studies at the Saïd Business School, Oxford University from 2001 to 2003 and Professor of Organisational Behaviour and Industrial Relations at London Business School from 1991 to 2000.

Alexander Pepper is Professor of Management Practice in the Department of Management at the London School of Economics and Political Sciences and Programme Director of LSE’s Global Master’s in Management. He was previously a partner at PricwaterhouseCoopers, where he held various senior management roles, including as Global Leader of the Human Resource Services consulting practice from 2002 to 2006.

Notes

1 There is a separate and equally important question about how best to measure intra-firm inequality and inter-firm variances in inequality. Multiples, as referenced here, are easy to calculate but potentially misleading. More sophisticated measures, for example organisational-level equivalents of Gini coefficients or Atkinson inequality indices, are complex and impossible to calculate based on published information.

2 It should be noted that new regulations requiring the disclosure of pay ratios in the United Kingdom were introduced in 2018. The new requirements apply to companies reporting on financial years starting on or after 1 January 2019. Quoted companies registered in the United Kingdom with more than 250 UK employees will be required to publish the ratio of their CEO’s single figure total remuneration to the median, 25th and 75th percentile total remuneration of their full-time equivalent UK employees.

3 Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act 2010 (the Dodd-Frank Act) required the SEC to design rules to implement the requirement that a public corporation should disclose the ratio between the total compensation of the CEO and all other employees.

4 Sir Martin Sorrell, who was CEO from 1986 to 2018, left WWP plc in 2018. His replacement, Mark Read, was reported to be receiving a pay package of around £7 million per annum.

Additional information

Funding

This work was supported by a grant from The International Inequalities Institute at LSE.