A first study of its kind found no meaningful correlation between the CEO-employee pay ratio and business performance, whether measured by total shareholder return, profit growth or return on capital employed.

Jon Dymond at Hay Group comments: “More equal pay does not equate to better business performance.” Of course, a cap is aimed at achieving fairness not performance, but who is to say what level of cap would be fair? He continued; “A blanket cap on executive pay would ride roughshod over the unique differences between firms’ business and operating models.” A cap may also result in one or more potential knock-on effects, beyond achieving a fairer balance of pay between CEOs and their employees. According to Jon, firms could: Outsource lower paid roles without proper reference to performance, immediately lowering their ratio, but doing nothing to even out pay across society.

Increase employee pay, which will in turn reduce profitability, shareholder return and ultimately the value of pensions and other investments. Reduce CEO pay, risking a talent drain from UK boardrooms, making it more difficult for them to compete with overseas firms and potentially encouraging our largest firms to move overseas – leading to a lower tax take for the treasury. Unique research from global management consultancy Hay Group analyses the ratios of CEO and average employee pay in UK firms, and the relationship between this and business performance. The CEO-employee pay ratio is a topical measure, given the forthcoming Hutton Review of fair pay in the public sector.

Hutton is expected to recommend capping executive pay at a number of times the salary of the average or lowest paid worker – inevitably leading to the suggestion that something similar should apply in the private sector.

9 February 2011

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