This image shows the explosion in pay of the people in charge of the UK’s one hundred biggest companies compared with their workers in the last 40 years. Nearly a quarter of these are financial companies of one sort or another..

The small blue box - the head of the snail - represents the pay of a typical full time worker. The yellow box shows how much more than a worker those top bosses were paid on average in 1980 - about eleven times more. The big pink box shows the equivalent ratio for 2022, when the top one hundred bosses were paid 118 times more than their typical full time worker, an average of £3.91m each.

This story about excessive pay is not just about fairness or equality. If you take that £3.91m and spread it around a large workforce it won’t go very far. Much more important is the reason for the pay, which is justified not by the usefulness of a company’s productive activity but the delivery of “shareholder value.” That means an increase in the company’s share price and the amount of money it returns to investors through dividends and share buybacks.

Much of the money in that big pink box is a bonus of some sort, tied to how much money the company is able to extract from the rest of the economy to pass on to its shareholders. Often the main driver of these executive bonuses is not even the profitability of the business activity, but the performance of a company’s share price.

High share prices boost the assets of existing shareholders, but they reduce value for people buying into the markets, for example through their monthly pension contributions. A focus on the share price can also discourage long term productive investment, since that longer perspective can depress share prices in the shorter term.

What the image reveals, therefore, is a not-so-subtle shift in the objectives of these top company bosses, who now prioritise wealth extraction over real production. Their main incentive is the amount of money value they can return to shareholders to meet their own, short term bonus targets. Reducing staff wages and benefits, increasing prices, and constructing complex, cross border financial arrangements to reduce taxes are all extractive processes that work much more quickly than long term investment in new talent, products and processes.

This is not to say that those bosses back in 1980 were not focussed on shareholder value. What has changed is the regulatory framework in which they operate, the investor-friendly tax regimes to which they are subject, and the commercial culture that this has given rise to, favouring short-term capital transactions over regular, long term productive activity.

These changes are a direct consequence of the market deregulations and mass sell-offs of public assets in the 1980s and ‘90s. Instead of using assets to create new value, which is their logical purpose in the economic system, the trading of assets such as land, companies and loan books (the money a bank is owed) has become a primary economic activity in its own right. It is the trading of mortgage loan books that triggered the financial crisis of 2008.

The rise of private equity capital, through which productive businesses are routinely bought and sold, sweated for their asset values and loaded with debt, is a symptom rather than the cause of this. The cause itself is the perversion of free-market principles into a political and economic dogma in which real, useful production has been relegated to a bit-part.

Data sources:

Data for 1980 is referenced in a report here, at page 4 footnote 2. Data for 2022 is in a different report here. Typical full time pay is the median figure for full time UK workers. CEO pay is the average for FTSE 100 companies.