Paytime at the top

Payout2 November 2011

Large bonuses and increasing income inequality has sparked headlines and popular protest. Recent research findings from the National Institute for Economic and Social Research (NIESR) show that the pay gap between top and mid-range earners is likely to widen.

"The financial sector has taken a disproportionate share of economic growth, and it is not surprising that we are seeing such popular discontent," NIESR Director Jonathan Portes commented to Reuters. "The prospect of income inequality is likely to rise again, driven both by structural change and governmental policies."

Top pay in the UK, a seminar hosted by the Centre for Economic Performance on 4 November as part of the ESRC Festival of Social Science, will be focusing on how pay at the top has changed over the last few decades, particularly for bankers and CEOs.

Findings from CEP show that pay over the last decades rose fastest for those at the very top of the income distribution. Between 1998 and 2008, the top 1 per cent of earners increased their share of the total income by 2.8 percentage points.

The gainers were spread across many professions and industries, with the top earners in most fields having large wage gains relative to the average worker. This was true for lawyers, bankers, CEOs and sport stars.

Findings by CEP researchers Brian Bell and John Van Reenen show that two-thirds of the income gains for the top 1 per cent went to people working in finance, with almost all of the gain in bonuses (CEP Paper April 2010: Bankers' pay and extreme wage inequality in the UK (PDF, 236Kb).

CEOs have also done well during the 2000s. While research covering the 1980s and early 1990s found a weak or non-existent link between CEO pay and performance, this changed over the last decade with a larger share of executive pay in the form of equity-linked compensation and an increased focus on corporate governance. New research from the CEP to be released on 4 November suggests a much stronger link between pay and performance for senior executives.