In Theresa May’s first speech as Prime Minister she announced a bold new approach to corporate governance, with a raft of measures aimed at curbing the excesses of executive pay. Last week, the government turned rhetoric in to action, with a Green Paper that included support for the mandatory publication of pay ratios between a company’s highest paid and median paid employee, to apply to all medium and large businesses.

As an organisation that has long campaigned on this issue, we at The Equality Trust are delighted to see light at the end of the tunnel. For those uninitiated with the issue of executive pay, and the importance of pay ratios, let’s start at the beginning.

Excessive executive pay is a key component of economic inequality. Over the past 30 years it has increased at a dizzying pace, outstripping the often glacial progress of median and lower wages. In fact, the average annual pay for a FTSE 100 CEO is now £5.5m – around 183 times the average full-time salary in the UK. Evidence shows that such high levels of economic inequality are hugely damaging for our society, resulting in poorer mental and physical health, worse educational outcomes and lower levels of trust in others. Significant research from the IMF and OECD suggests high inequality may even be bad for the economy.

The most common argument to justify the pay of executives is simply that ‘they’re worth it’. With companies now often global in their reach, and increasingly technologically and logistically complex, those running them are required to have a unique and multifaceted skills-set. The rarity of such individuals means they are worth their weight in gold, so the argument goes. This is, in part, true, but given the skills of many others have also improved, along with their productivity, it fails to account for why the wages of ordinary workers haven’t increased at a similar pace to executives.

This is all the more galling when you consider evidence that suggests that luck is a strong determinant of CEO pay.

In reality, much of the increase in executive pay, and subsequent pay inequality, is a result of the bizarre process by which it is set. While the pay of ordinary workers is determined by executives, the pay of executives is often determined by external remuneration committees. These often fall foul of the so-called ‘Lake Wobegon’ effect, insisting that to get, or retain, the best candidate, a CEO should be paid above the average pay for their peers in that sector (often in the top quartile). The predictable result of all companies attempting to pay in the top quartile is a ratcheting up of executive pay, and a widening of the pay gap. This idea of a common culture in remuneration is supported by the fact that in the US only five consultancy firms control 50% of the market on compensation consultancy.

So why does this matter? Most reasonable people recognise that the success of a business is built on the actions of all employees, and therefore, all employees should enjoy the fruits of this success. Businesses thrive when employees feel like they are valued, and have a stake in the company’s future. When millions of people are poorly rewarded for their hard work, while those at the top carry on raking it in regardless of performance, it’s inevitable that people will feel disillusioned and disconnected from those they work with.

Polling by the CIPD also warns of the demotivating effect on workers of excessive executive pay, with 71 per cent saying bosses’ pay is too high and 59 per cent feeling directly demotivated by it. When you consider more than half of the membership of the Institute of Directors identified ‘anger over senior levels of executive pay’ as a threat to public trust in business, it is clear that such pay inequality provides a serious business risk.

None of this is inevitable. The simplest way to tackle excessive executive pay and reduce the pay gap is to require large and medium sized businesses to publish the pay ratio between their best paid employee and their median earner, as proposed this week. Alongside this, companies should be required to provide an account of why the pay ratio is justified, in particular, if the ratio increases from one year to the next.

There are two benefits to such a measure. The first is the old adage that light is the best disinfectant. With the spotlight on them, it is unlikely companies will wish to appear more unequal than their competitors. The second benefit is the possible effect it will have on pay culture within companies. Rather than divorcing the process of determining executive pay from that of ordinary workers, companies will be forced to consider how their overall approach to pay fits together.

The extremely high pay ratios we now see in many companies are both unjustifiable to large numbers of the public, and often a woefully inaccurate measure of the financial value added by executives. Businesses rely on the trust of consumers. Those companies that see executive pay rocket while the pay of their average worker stagnates will struggle to square that with discerning customers, who correctly question why some organisations see executives as talent to be nurtured, and other staff as a cost to be reduced. Pay ratios are a first, but vital, step to develop a culture of governance where the worth of all employee are considered, and where businesses, and the economy, genuinely benefit us all.

The post Mind the Gap: How pay ratio reporting can help reduce inequality appeared first on New thinking for the British economy.

Housing is an issue that is rarely far from the news. Sky-high rents, insecure accommodation, and a lack of affordability are issues familiar to us all. It’s not surprising; housing has always been about more than just bricks and mortar. A solid roof over our heads and a stable home are universal desires, and for many of us they are the bare minimum for a dignified and respectable standard of living.

However, in the UK today many continue to struggle to achieve such basic necessities. The pitiful state of rental accommodation in this country in particular is a crisis that has been years in the making, with the disastrous decision to decimate the country’s social housing stock leaving millions of low income households without decent, affordable accommodation. Most find themselves shunted into the private rental sector, often living in sub-standard accommodation at extortionate cost.

Of course, not everyone is suffering in this housing crisis. Around a quarter of the UK’s richest 100 people have built their wealth, at least in part, through interests in housing. These 24 people now have a combined wealth of £78.55bn, the equivalent of 375,740 average priced houses. The reality is, the housing crisis is not being equally felt – some are earning a fortune from it.

For the unlucky rest, facing huge rental costs, the problem is compounded by archaic taxes on housing, like Council Tax, a tax on property that estimates the value of housing based on an evaluation conducted in 1991. Unsurprisingly, this provides a rather distorted picture of house prices, and therefore an unrealistic account of what residents can afford to pay.

Council Tax is not only outdated, it’s also hopelessly regressive, hitting the poorest households disproportionately hard. While a household in the richest tenth pays around 1.5 per cent of their income in Council Tax, a household in the poorest tenth pays around 7 per cent. That’s a huge drain on the finances of low income households, and partly explains why so many people are struggling to keep a roof over their heads and food on the table.

So what can be done? The most obvious step is a reform of Council Tax, with the current highly regressive model replaced by a progressive property tax.

Different models have been proposed for how a progressive property tax would work. For example, the Joseph Rowntree Foundation has suggested rates that rise modestly as property values rise and that, together, combine to deliver an overall revenue-neutral alternative to Council Tax. The rates would be 0.43 per cent on property value up to £110,000; 0.53 per cent on the whole of property value up to £160,000; 0.63 per cent on the whole of property value up to £230,000; 0.73 per cent on the whole of property value up to £400,000 and 0.83 per cent on the whole of property value thereafter.

They estimate such a tax would reduce the size of median gross bills by £279 a year compared to the Council Tax; reduce the bills of almost two-thirds of households by more than 10 per cent; and reduce gross median bills for the poorest tenth of households by £202. It would increase bills for the top tenth by £184. Clearly, this would be a huge benefit to those households struggling with high housing costs. In fact, an extra £202 would cover around a month’s worth of housing and heating costs for the poorest tenth of households. It could also pay for more than a month’s worth of food, an invaluable boost to incomes with Christmas fast approaching.

A progressive property tax would not come without challenges. Due to the significantly higher property prices in the capital, poorer households in London could find themselves hit even harder by such a tax. However, to offset this ‘London effect’ it could be left to local areas to determine how they develop the tax, to ensure poorer households aren’t disadvantaged.

In order to iron out such kinks, it is vital that a commission on local tax reform is established for England, as has been the case in Scotland. This would allow a range of options and their impacts to be systematically and methodically considered.

The temptation is to see the housing crisis as a generational divide – the lucky ‘baby boomers’ pitted against the jilted generation of ‘millenials’, but his misunderstands the scale of the problem, and who it affects. Many people within older generations are horrified at seeing their children and grandchildren trapped in sub-standard accommodation and paying a fortune for the privilege. Few of them want to see their children living in their spare room into their forties and fifties.

Politicians need to recognise that our housing crisis is in fact both a symptom, and a cause, of our extreme inequality. The richest 1,000 people in the UK now have more wealth than the poorest 40 per cent; and this is in large part due to the extreme differences we see in housing wealth. If we don’t want to see future generations trapped by impossible housing costs, we need a drastic overhaul of our housing policy, starting with a progressive property tax.

The post A house divided: How a progressive property tax can solve our housing crisis appeared first on New thinking for the British economy.

When the government announced plans to cut £4bn of in-work social security in its summer budget last year, it was widely condemned by commentators and organisations for hitting some of the poorest working families hardest.

The cuts, which focused on tax credits, were subsequently scrapped by the Government during its Autumn Statement, but this merely deferred the pain. Rather than being shelved altogether, the cuts were instead transferred to the new social security system of Universal Credit (UC), now being rolled out. The result is the same: huge numbers of families are being squeezed, with their incomes reduced as they move onto the new system.

Universal Credit works by pulling together a number of social security strands into a single payment to recipients. As people earn more, their UC payments are then gradually withdrawn. In principle, it’s a simple idea that should make the system more efficient, but the design of the current policy comes with a fatal flaw – the swingeing rate at which UC is withdrawn.

Analysis by the Equality Trust found that once UC withdrawal and other taxes are taken into account, many recipients would keep barely a quarter of their additional earnings. Far from helping people ‘lift themselves out of poverty’, the eye-wateringly high marginal tax rates people face under UC mean they are more likely to be locked into low incomes. This is all the more galling when considering that a person in the richest 1% faces a far lower tax rate, keeping more than half of their additional earnings.

This might be consistent with a plan to reduce overall public spending, but the government remains committed to reducing taxes on the well-off at significant cost to the public purse. Raising the income tax personal allowance, the amount someone can earn before they pay income tax, will cost £4bn across this parliament, and will disproportionately benefit higher income households. Raising the threshold at which the higher rate of income tax is paid will similarly only help those on higher incomes.

These policy decisions reinforce the UK’s extreme levels of inequality, to the profound detriment of our society. The UK is one of the most unequal countries in the developed world, and evidence shows this extreme inequality damages trust and social participation, encourages crime, decreases social mobility, shortens life expectancy and increases debt. It means we suffer from poorer educational outcomes and worse mental and physical health than developed countries with greater equality. Our system of in-work social security, and the new system of Universal Credit, exacerbates this inequality.

So what can we do to change this? The answer is simple: the government should reduce the rate at which UC is withdrawn. The original plans for UC envisaged recipients losing 55p of every additional pound, but this was changed to a more punishing rate of 65p. Combined with other taxes this means recipients lose 76p of every additional pound they earn.  Reverting to a more generous 55p withdrawal rate would cost the government £4bn across a parliament, but it would make a real difference to those who are struggling. A single parent, for example, could be over £125 a month better off.

This could be paid for by freezing the planned increased in the income tax personal allowance, and unlike the personal allowance, it would be of far greater benefit to low income households and the famed ‘just managing’ that the Prime Minister has sworn to serve.

This wouldn’t just be a fairer system of social security; it would also be a more popular one. Polling conducted by Ipsos MORI on behalf of The Equality Trust found strong support for reducing this tax on aspiration, with a clear majority believing that people on low incomes should be able to keep more of what they earn. Smart politicians would seize on this, and offer the public what it wants.

Being able to make ends meet, to begin to save for the future and to be free of the blight of poverty and insecurity is an aspiration we all share. We all want to know we can secure a dignified retirement. We all want to build a better life and better opportunities for our children. When the social security system works well, it supports these goals, fighting poverty by supporting those out of work, helping people back into work, and encouraging progress through work. In doing so it also reduces our dangerously high levels of inequality.

Instead, Universal Credit acts as a brake on the opportunities for low income households. At the same time, successive governments have built a wider system of taxes and social security that prioritises lowering the taxes of the rich, whilst failing to tackle the barriers that impede the poor.This has to change; a system of Universal Credit that allows low income households to keep more of the money they earn would be a good place to start.

The post We must reform Universal Credit to prevent it from penalising low-earners appeared first on New thinking for the British economy.