The new Lloyds Bank boss is to get an annual package of £13m, with a £4m ‘golden hello’, (The Guardian 31st March 2011). In his interview with Charles Moore reported in the Daily Telegraph earlier the same month (5th March ) , Mervyn King, the Governor of the Bank of England, pointed out that manufacturing and service industries all over the country pay far less than financial services He said that this was “because bosses in those industries care deeply about their workforce, about their customers and, above all, are proud of their product. With the banks, its different- there isn’t that sense of longer-term relationships”. Huge bonuses were announced recently for Barclays Bank executives – £6.5m for boss Bob Diamond, £10.6m for the aptly named Rich Ricci. In total, Bob Diamond is in line for £27m pay this year, despite shares falling and dividends cut – at a time when bank lending to manufacturing has fallen (Polly Toynbee, The Guardian 20th April 2011).
Such news items may make people wonder how the difference between their pay and that of a top banker has grown so much . Conventional economic theory says that pay is related to productivity, and to supply and demand – broadly speaking, that people are paid what they are worth. This theory has been disproved time and time again, and yet it is still widely believed It is generally believed that the top bankers who got near to collapsing the whole world’s financial system are worth the enormous pay and bonuses they still award themselves. Bankers have scared the British Government into refraining from limiting or taxing their huge pay and bonuses more heavily for fear that bankers would emigrate and deprive Britain of the very valuable services which they are thought to be providing.
Underlying the fear that bankers would emigrate if their pay were to be cut is the theory that the prices – the wages, salaries and bonuses paid to different sorts of workers – are determined by supply and demand. The theory says that pay gravitates to the level at which the demand for a particular skill is equal to the supply. The theory also assumes that people are paid roughly in accordance with what they contribute to a firm’s operations. Economists and the general public still believe that the economic theories of supply and demand and productivity apply to wages and salaries. In contrast,historical evidence shows that pay is determined mainly by social status and power. People are generally paid partly in accordance with what society as a whole thinks they are worth, and partly by the power they have to grab resources.(1)
Top British bankers claim that if their salaries and bonuses were to be reduced or taxed more heavily, many of them would emigrate to better paid jobs abroad. That is very unlikely. There has never been a shortage of good senior bankers in the United States, Japan, and Europe. Why would banks in those countries want to import British bankers who want to leave Britain because they think that they don’t get enough pay?
Few people seem to realise that the main reason why top bankers are paid huge salaries and bonuses is because they are greedy people who control enormous funds. Their high pay and bonuses bear little relationship to supply and demand, or to their productivity. Bank bosses allocate large proportions of the funds they control to themselves, instead of offering enough loans to small businesses which need the money to run their businesses. Why do other bosses of very large, profitable enterprises in manufacturing and service industries pay themselves much less than top bankers? The answer is breathtakingly simple. Some of them may be quite greedy, but they are nowhere near as greedy as top bankers.
Does it matter to ordinary people if bank bosses working similar hours make more money in a few days than they get in a lifetime? Richard Wilkinson and Kate Pickett have shown that extreme inequality does matter. Some other countries which have more successful economies than Britain – such as Sweden Norway, Denmark and Japan – also have much more equal incomes than Britain. A huge range of things are better in those countries than they are in Britain – life expectancy , mental health, drug abuse and violence, literacy levels, obesity and teenage pregnancy are better in more equal countries. Countries with bigger gaps between rich and poor –in particular the United States – are bad in many ways for nearly everybody – whether they are poor, in the ‘squeezed middle’, or even very rich. For example, even though the United States is the richest country in the world, more people suffer from bad healththere than they do in several poorer countries where incomes are less unequal.
The balance of evidence is that nearly everybody would benefit if Britain were to become less unequal.
(1) Guy Routh, Occupation and Pay in Great Britain, 1906-1979, London, Macmillan, 1980, pages 181 -220
(2) Richard Wilkinson and Kate Pickett, The Spirit Level: Why More Equal Societies Almost Always Do Better, Allen Lane, 2009.
Thanks to Jessica Hodge for some of the thoughts and material in this piece.