How much does one man need?

I once read a short story by Leo Tolstoy called How Much Land Does a Man Need?. You might guess the principle behind the story from the title. But to spell it out, a man was told he could have as much land as he could walk around in a circumference in one day. As you might guess, he got so greedy that he was unable to complete the square in time, so ended up with nothing.

The story came back into my mind as I read the very public debate over the size of the pay packet that was apparently agreed for the now departed Co-operative Group chief executive, Euan Sutherland. Even recognising the high house prices in London – which is where the Group chief executives now conduct most of their business – a remuneration package of £3.6m seems beyond the level that one man needs.

There are, however, issues beyond how much it costs to live – apparently. We also have the issue of corporate competition. Whether this is about competing for talent or men looking over each others’ shoulders and saying yours is bigger than mine (and vice versa) is unclear.

Anyway, let us be objective and compare pay rates. As chief executive, Peter Marks was paid a total of £1.3m in 2012, of which £1.014m was basic pay, topped up with some other benefits (including pension contributions) and even included a bit over £100,000 in performance related-pay relating to previous years. (It would be nice, of course, if this could now be recovered, given recent events.) In 2011, a much better trading year, Marks received rather more – £1.661m in total.

If we are going to compare CEO pay, we should first consider which other retailers we might compare the Group with. It is the fifth-largest UK food retailer, with a turnover of £11.3bn in 2012 (excluding the Bank). According to Wikipedia, this gives it a market share (combined with other retail societies) of 6.3%.

This is some way behind the four biggest food retailers. Tesco is shown as having a 29.8% market share; Sainsbury’s, 17.7%; Asda, 17.5%; and Morrison’s, 11.5%. The next largest food retailer after the Co-op is Waitrose/John Lewis Partnership, at 4.8%. For reasons both of size and comparability of structure, Waitrose/John Lewis Partnership is the best comparator.

For the record, though, we will list the pay of the CEOs at the biggest retailers – while recognising that they are in fact very much bigger than the Group. Tesco’s CEO is Philip Clarke, whose base salary is £1.1m, but with a very generous performance pay additionality of up to 250% of basic pay, plus a performance share of 275% of basic pay: a potential total of £7m a year.

At Sainsbury’s, the departing CEO Justin King is on basic pay of £940,000, but the total remuneration package in 2012/13 was £4.268m, which includes an annual bonus of almost £1m and a long term share reward of almost £1m. We should, in fairness, recognise that these types of bonuses are impossible in a mutual business, which cannot offer bonuses in shares, nor link performance pay to share price.

Asda is owned by a private company in the UK, which is ultimately owned by WalMart in the US. Neither the private UK company nor the US parent publicly reports on Asda’s executive pay. At Morrison’s, the CEO is Dalton Philips who in 2012/13 was paid £850,000 in salary, with a total remuneration of just over £1m in 2012/13, which was a difficult year. His pay was slightly above £1.7m in the previous year, once additional remuneration is included.

So the reported demand for £3.6m in pay would have placed Sutherland still behind the CEO pay of the two grocery giants Tesco and Sainsbury’s – but these are so very much bigger than the Group that there is no comparability here. Morrison’s is also significantly larger than the Group – it has some similar trading difficulties to the Group, yet the CEO pay is very much below that agreed for Sutherland.

Let us then look at the closest comparator, the John Lewis Partnership, of which Waitrose is just one part of the business. JLP has an executive chairman, Charlie Mayfield, whose role is similar to that of the Group CEO. His total package last year was £1.5m. Moreover, the Partnership’s annual report states: “Our benefits and remuneration are benchmarked annually to support competitive packages and attract talent.”

It is unclear why the Partnership’s benchmarking exercise came to a conclusion that the relevant executive pay level was less than half of that of the amount the Group’s exercise came up with. However, and perhaps more relevantly, the figure was in the same ball park as the amount paid to the Group’s previous CEO, Peter Marks.

But pay policy is not just a matter in relation to the CEO and other executive positions. The departed CEO warned that a big pay increase was required to attract and retain the executives needed to turn around the Group’s financial performance, which is expected to show a loss for 2013 of around £2bn.

The prospectus for the listing of the shares in the Co-operative Bank provided its own warning regarding the pay policy at the Group. Here, the warning was rather different: the Co-operative Food could be placed in difficult trading circumstances if the Group yielded to political pressure arising from its ethical trading position and this translated into a pay increase for its lowest-paid staff.

The prospectus explained: “Along with the other major retailers … the Co-operative Food is increasingly put under pressure to extend paying the ‘Living Wage’ from currently a relatively small number of its employees to its workforce generally. Based on its ethical trading principles, the Co-operative Food is implementing a strategic transformation plan to increase wages paid to store staff to match the prevailing wage levels. Paying the Living Wage to all of its staff will result in a significant financial impact on the Co-operative Food and may ultimately have an impact on the financial performance, business and results of operations of the Group.”

This is an issue across the retail and hospitality sectors in particular, which tend to rely on staff who are paid the minimum wage. It is also a very challenging issue for the Group. John Gorle – Usdaw’s national officer representing Co-operative Group workers, explains: “Usdaw sought from the Co-operative Employers Association (CEA) a commitment to work towards becoming a Living Wage employer in last year’s pay negotiations and we were pleased that the employer has set up a working party to develop a wage strategy for the business.

“The Co-op Group currently pays executives and senior managers the median of comparable appointments and that is a policy we would like to see extended to all staff in the business. There are a number of big players now in the convenience store sector and unfortunately Co-op societies currently pay at the lower end of the range. As a first step towards paying the Living Wage, we want the CEA to agree to shopworkers being paid at the median hourly rate of convenience store staff across the sector.”

Where employers do only pay the minimum wage, it is ultimately taxpayers who meet much of the cost. As taxpayers we often top up low pay through tax credits (which cost us £30bn a year), housing benefit (£17bn annually), income support (£7bn) and council tax benefit (£5bn). A significant amount of each of these benefits is paid because many employers pay less than a living wage.

Taken together, these benefits represent about half the total of the non-pension welfare budget.

There is, therefore, a very strong argument that when many people in politics shout about the cost of unemployment, they are firing at the wrong target. The Jobseeker’s Allowance costs less than £5bn a year and the employment and support allowance also cost less than £5bn a year. (Though it must be recognised that people out of work also receive some of these benefits.)

The UK has a much higher percentage of workers on low pay than is the case in most of our competitor nations. At present, the UK national minimum wage is £6.31 for over-21. This will go up to £6.50 an hour from October. At the new rate, this works out at £12,500 a year, assuming a 37 hour day. Had Sutherland obtained his £3.6m pay, that would have been 288 times greater than a full-time staff member on minimum pay.

The Living Wage Foundation argues that the minimum pay needed for someone to give them a decent standard of life is £7.65 an hour, or £8.80 an hour in London.

For a Manchester worker, that would be £14,719. It might be classified as a living wage, but the truth is that I could not live on it.

And we know that Euan Sutherland couldn’t, either.

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