The theory: work out the average worker's pay in a company,
calculate the ratio between that average pay and the CEO's pay,
and then, if the ratio is large, name and shame the company
and its overpaid boss.
In terms of looking at ways to deal with excessive boardroom pay
this theory looks like a good one and, in fact, the US is also
contemplating doing something similar. Theresa May wants to
implement this in the UK and is to include it as part of a package
of corporate reforms to be announced shortly. However, practically,
a simple ratio may not have the desired effect.
In practice, a company with larger numbers of well-paid staff
will have a smaller (and therefore "better") ratio than a
company with larger numbers of lower-paid staff. This issue was
dubbed the "Goldman-Waitrose issue" by Vince Cable when
he was considering implementing similar changes. He ended up
abandoning the ratio idea because of this issue.
Theresa May, however, appears to be committed to implementing
the publication of this ratio. Officials are currently looking at
how the ratio is calculated, in order to try to make it more
effective. Presumably they are looking at ways to overcome the
"Goldman-Waitrose issue", as well as looking at how to
include other factors that could otherwise distort the ratio (for
example the disparity of average wages between London and the
regions). So it looks as though, in order for the ratio not to be
misleading, the calculation will need to be more sophisticated than
perhaps initially first thought.
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