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Reading wage inequalities from published company financial statements

Prem Sikka and Bob Wearing


In recent years, there has been considerable public anxiety about the increasing level of wage inequalities in the UK (for example see, Department of Social Security, 1999; Hutton, 1999). Newspapers, magazines and employee organisations routinely report that a small number of company executives have been giving themselves exorbitant or 'fat cat' financial rewards (salaries, share options, perks) whilst the wages of their employees have failed to keep pace with inflation or productivity gains (for example, Financial Times, 27 October 1999, p.1; The Observer, 11 July 1999, p. 1; the Times, 29 September 1999, p. 11; The Guardian, 29 March 1999, p. 18). Some of the information for this debate has been extracted from the audited financial statements published by the companies to satisfy the requirements of the Companies Act 1985 (Trade Union Congress, 1999a, 1999b, Labour Research, November 1999, p. 17-18). This paper examines the nature of such statistics. It shows that the information included in company accounts is incomplete and is based upon political compromises reached between the state and capitalist enterprises. However, even this incomplete information, it is argued, can be used to problematise the status quo and support calls for a more equitable distribution of wealth.

This paper is divided into four sections. The first section provides the socio-political context for understanding wage disclosures in company accounts. Such disclosures were first required by the Companies Act 1967 (now part of the Companies Act 1985). It is noted that the wage disclosures required by the state were primarily concerned with the pursuit of macro economic policy objectives rather than any concerted concern to highlight or reduce wage inequalities. The second section shows how the information about wage inequalities can be extracted from published company accounts to estimate the wage differentials between the highest wages and the average wage paid by a company. It also draws attention to the limitations of the information published in company accounts. The third section shows that despite its limitations, the information disclosed in the company accounts can be used to highlight increasing wage inequalities and thus foment potentialities for change. Our data show that the wage differentials are at the highest in companies that are significant employers of women and young persons. The fourth section provides a summary and also engages with the criticisms that due to the incompleteness of data the resulting analysis of wage inequalities is of little use.

Wage disclosure: the sociopolitical context

Inequalities in the distribution and income of wealth are an inherent feature of capitalism. Such inequalities have a capacity to create resentment and anger as they deprive many people of adequate food, housing, health-care, education, pensions and access to material and symbolic goods and services (Acheson, 1998; Department of Social Security, 1999). The inherent inequalities problematise a social order which also encourages belief in justice, fairness and egalitarianism, yet continues to perpetuate inequalities that affect people's life chances. In liberal democracies, the state actively encourages the belief that capitalism is not corrupt or over-exploitative. To secure legitimacy for its policies and capitalism generally, the state encourages the belief that its policies are geared towards securing fairness, equality and justice. In liberal democracies, for ideological reasons the state is generally not permitted to own the means of production. Therefore, it cannot directly control wages. This severely limits its ability to drastically reduce or eliminate wage inequalities. Any systematic attempt by the state to reduce wage inequalities also has the capacity to undermine the 'market principle' which promotes the perception that wages are related to the laws of supply and demand and that 'people receive a fair day's wage for a fair day's work'. Such ideologies obfuscate the inequalities inherent in capitalism. Faced with numerous contradictions and conflicts, the state introduces policies that seek to periodically (re)affirm the commonsensical understanding that it is somehow concerned to reduce wage inequalities (e.g. minimum wage legislation, welfare support reforms). This helps to mask the state's inability to change the nature of capitalism and the resulting wage inequalities.

Inequalities in the level of wages flow directly from the capitalist mode of production (Marx, 1976). Labour is treated as a means of production and has to be exploited to increase profits. To maximise economic surpluses capitalists seek to cheapen labour through deskilling (e.g. through technology), gender inequalities and the global mobility of capital. Capitalist economies are in a constant state of crisis. A higher level of wages has a capacity to undermine the rate of return enjoyed by capitalist entrepreneurs and affect the levels of production, investment and competition. A lower level of wages has a capacity to sap the strength of employees to purchase goods and services and thus not enable capitalists to accumulate adequate profits. In this context, wages are not determined by supply and demand, as some neo-classical economists argue, but by the power of labour. The inequalities in power inevitably produce inequalities in wages and incomes. As financial rewards affect access to material goods and services, the inequalities in wages assume considerable social and political significance.

Given the nature of capitalism and the inability of the state to eliminate wage inequalities, various groups/classes seek to mobilise public opinion for an equitable distribution of wealth by appealing to principles of equality, justice and fairness. This struggle inevitably involves some 'truth claims' (Foucault, 1980) as the competing groups seek to ascribe a certain kind of hardness (or objectivity) to the wages data advanced by them. In principle, statistics about wage inequalities can be produced in a variety of ways - for example through the taxation data collected by the Inland Revenue, or via questionnaires and interviews with employees and employers. Each of these poses questions about the cost of collecting information and the comprehensiveness of the information collected. In a society where the 'public' and the 'private' domains are sharply separated, any attempt by the state to produce a comprehensive database about wage inequalities are likely to be met with claims of 'interference', 'unwanted intrusion' and 'big brother' indulging in wasteful public expenditure. These complexities and contradictions have produced a paralysis of the state. At one level, it needs mass support for its own legitimacy. Therefore, it is obliged to appeal to notions of justice, equality and fairness and secure a more equitable distribution of wealth. However, the state's ability to deliver equitable distribution of wealth is severely constrained by its reliance upon capitalist enterprises for its own survival. It is dependent upon the revenues (e.g. taxes upon profits and wages) generated by capitalist enterprises to finance its own expenditure (e.g. social security, defence, transport, etc.) and survival. Therefore, it has little choice but to promote policies that are deemed to be necessary for the long-term well-being and legitimacy of capitalism. Such policies can have unforeseen consequences, as the case of wage disclosures shows.

The above sociopolitical context provides a backdrop to an understanding of the wage disclosures in company annual reports. The 1960s were a boom period for the British economy. However, the relative affluence of this period was also accompanied by anxieties about the low economic growth rate, rising levels of inflation, unemployment, balance of payment deficits and the declining value of pound sterling (Armstrong, Glyn and Harrison, 1984). In this context, the Labour Government, with the support of trade unions and employers, began to introduce statutory controls on the levels of wages and prices of goods and services (Thomson, 1981). Such controls raised questions about how the assumed freeze or a regulated increase in wages was to be observed, or at least give the impression that it was capable of being monitored. In this context, the government introduced the Companies Act of 1967.

The Act, for the first time, introduced requirements that companies must publish statistics about the remuneration of employees and directors in their audited annual reports. Throughout the Parliamentary passage of the Act, the government's policies for implementing 'prices and income controls' formed the background to the proposals (for example, see Hansard, House of Lords Debates, cols. 123-230; House of Commons Debates, 21 February 1966, col. 36; 14 February 1967, cols. 365-370; 13 June 1967, cols. 328-350) though there was also considerable concern about the high level of director salaries. The government's proposals for disclosure of director remuneration secured support from influential press commentators (The Economist, 5 February 1966, p. 525). The Ministers also argued that in pursuit of "industrial efficiency and modernisation generally" companies ought to publish information relating to the total number of employees and the total wages and salaries paid out (Hansard, House of Commons Debates, 14 February 1967, col. 364). Throughout the Parliamentary debates, Ministers argued that the level of disclosures in the company accounts would enable the government to monitor compliance with the 'prices and incomes' controls and judge whether its policy had been breached(1).

The Companies Act 1967 (subsequently consolidated into the Companies Act 1985) required that the audited accounts of all UK based companies need to show details of the directors' remuneration(2) and identify the 'highest paid director', if s/he is not the chairman of the company. Since the 1980s, many company executives have been rewarded by lucrative share options - something which enables them to acquire (or gives the right to acquire) company shares at a considerable discount. In effect, the company gives something of considerable value to company executives, but the cost of it is not recognised in published company accounts. As a result, company profits are over-reported(3). To date, the Companies Act has not been revised to force companies to publish full details(4). The valuation of share options is a complex issue and the government expects the Accounting Standards Board (the ASB - an organisation responsible for regulating the contents of company financial statements) to deal with the tricky question of disclosures relating to share options. However, the ASB (1994) claims that the "difficulties of valuation stem from the fact that for most companies, valuation would require the use of theoretical models which become even more complicated and subjective when the rights under the option are contingent on future performance or other factors". The ASB (1994) concluded that "it is not presently practicable for it to specify an appropriate valuation method for options as a benefit in kind" and recommended that companies should disclose "the option prices applicable to individual directors, together with market price information at the year-end and at the date of exercise" (paragraphs 9 and 10).

For employees, the legal requirements (as amended by various statutory instruments) are that the company must disclose the total amount of wages and salaries paid in a financial year (The Companies Act 1985, Schedule 4, paragraph 56(4)). It also requires disclosure of the average number of persons employed under contracts of services in the financial year. As a result directors are normally included in this total but non-executive directors would normally be excluded. The Companies Act 1985 gives directors the discretion to analyse employees into appropriate categories. There is no legal requirement for companies to publish any mean, mode or median wage. Despite the original (1967) aspirations that somehow the disclosures could be used to monitor compliance with the 'prices and incomes policy', the legislation does not require companies to analyse their wages data by gender, age, ethnicity or any employment grade of workers. The Companies Act 1967 also required details of the 'highest paid employees' but these requirements were subsequently repealed(5) by the Companies Act 1989.

The next section provides details of our methods for extracting the wage inequalities data from published company accounts.

Wage inequalities: reading company accounts

To estimate wage inequalities, two kinds of data can be extracted from published company accounts. These relate to the wages paid to the highest earner, typically paid to a company director, and the average wage of company employees. In principle, one could go through the voluminous published accounts of each company to extract the data, but this is very time consuming and costly. An alternative is to use commercial databases compiled from the contents of published company accounts. We used the database known as DATASTREAM. We focused upon the information held at 31st August 1999. The database consists of the records of around 2,400 quoted companies, probably the biggest employers in the UK. We obtained copies of the annual accounts published by some companies and used this to verify the quality of the data held on the DATASTREAM database.

Following the unwillingness (or inability) of the government and accounting regulators to require meaningful disclosures of director remuneration (e.g. information about share options), the actual published information remains incomplete. During our scrutiny of the published information, we noted that a large number of companies did not identify the 'highest paid director'. In some cases, remuneration details are provided and the reader is left to identify the 'highest paid director'. But the disclosures are not reader friendly. The information about share options is highly deficient(6). Therefore, to avoid the charge that we have manufactured the financial gains to company directors we excluded the possible gains from the future exercise of share options from our calculations of wage inequalities.

In view of the difficulties outlined above, the data that we collected from company accounts considerably understate the financial rewards to directors. This point is vividly made by the disclosures relating to British Aerospace. The company's 1998 annual report and accounts (page 33) identify the highest paid director as earning 747,371. The same director also made gains on share options of 659,257 (i.e. 88% of the salary), making a total financial package of 1,406,628. In view of the problems identified in making comparisons with other companies, we are only able to use the figure of 747,371. Thus the director remuneration figures used in this survey underestimate the level of financial rewards to company directors.

The published company accounts disclose the average number of employees and the total wages and salaries bill. However, the average number of employees also includes company directors employed under a contract of service and the total wage bill also includes their (typically higher) salaries. The net result of this is that the average wage computed from published accounts is likely to be overstated. As noted above, the Companies Act 1985 gives directors the discretion to analyse employees into appropriate categories. We found that although all companies provided information about the average number of employees there was little consistency in the analysis of 'categories' that accompanied it. For example, some converted their employees to an average full-time equivalent but most did not. Hardly any company provided an analysis of employees by gender, age, disabilities, ethnicity, full-time, part-time employment or geographical location.

After eliminating companies with missing and incomplete data from our sample, only 1,199 useable companies remained (for further details see Sikka et al., 1999). For each of these companies, we ascertained the highest wage, the total wages and salaries bill and the average number of employees. This enabled us to calculate the average wage of employees which could then be compared with the highest wage. For this a wage differential figure could be calculated (see below). The next section shows the results of our scrutiny of published company accounts.

Wage inequalities: evidence from company accounts

In calculating the wage differentials, we expected the director salaries to be high, especially as there are no institutional or legal controls and government Ministers claim that "we are not in the business of controlling the level of directors' pay" (Accountancy Age, 21 October 1999, p. 25). In this environment, the directors' pay relative to workers has been rising rapidly. Between 1994 and 1997, company directors' pay (excluding perks) are estimated to have increased by an average of 53 per cent whilst employees averaged just 4% a year (TUC, 1999a). Another study reported that in 1998 company directors' gave themselves pay rises averaging 17.6% (Financial Times, 27 October 1999, p. 1) whilst some finance directors picked up an annual wage increase of 54% (Accountancy Age, 28 October 1999, p. 26).

It was anticipated that companies employing a large number of women and young persons would display large wage differentials. Despite the legislation outlawing sex discrimination, women continue to earn between 75% (The Independent, 10 July 1999, p. 12) and 80% (Daily Mail, 27 October 1999, p. 15) of the amounts paid to men for equivalent work.

The introduction of the minimum wage of 3.60 an hour (3 for 18-21 year olds), or 7,500 a year for full-time employees, may have some impact on reducing the wage differentials, but it was not expected to be significant as the amount has been set at a low figure. In the name of 'flexibility', about two million people (about 1 in 15) work (mostly female) on a temporary basis. With the introduction of the Work Times Regulations - that limit the maximum working week and give workers' rights (e.g. holidays) - some found that their hourly rates have been reduced (The Times, 29 September 1999, p. 11).

In pursuit of higher profits, many companies are locating their labour intensive operations in developing countries, or they hire foreign workers at low wages. It has been reported that major offshore oil companies are paying non-UK employees as little as 81 pence an hour (the Observer, 7 February 1999, p. 1). Others use children and pay them just 18 pence an hour (The Observer, 20 June 1999, p. 5). Temporary workers producing keyboards for computers earn only 96 pence an hour (The Independent, 29 September 1999, p. 1). So it is likely that companies with significant operations in developing countries would display higher wage differentials.

Based upon prior studies, public revelations and our discussions with some employers and employees we hypothesised that organisations employing women, part-time staff, casual staff and non-UK based employees would show the biggest wage differentials. As such persons have a heavy presence in the retail trade and supermarkets, we expect these industries to show the biggest wage differentials i.e. the inequalities between the average wage and the highest wage. Most shop assistants, check-out operators, shelf-fillers, clerks, machinists, forecourt attendants, security guards, casual labourers and others receive wages very close to the level set by the national minimum wage. As a general rule, the higher prevalence of the female, part-time and relatively unskilled staff is likely to be accompanied by the biggest wage differentials. The size of the differential also depends upon the number of full-time and managerial staff employed by the companies. A snapshot (at 31st August 1999) of the wage differentials in the sectors of retailers (general) and food retailers is provided below. Similar ratios were found for the restaurants and leisure, and food manufacturers sectors.

Retailers, general

The retail trade is thought to be the highest employer of women, young and part-time staff, often considered to be unskilled and usually in a weak bargaining position. Therefore, not surprisingly, the retail trade has the largest wage differentials. Table 1 shows that Kingfisher Plc with nearly 110,000 employees in its chain of stores (including Woolworth, B&Q, Superdrug, Comet) has the highest differential at 269. The company's directors collected over 5 million in salaries. The highest paid director received 2,062,000. In comparison, most of the employees working for retailers, on average received between 7,000 and 8,000. The low wages also indicate the superior bargaining position of the employers. They can keep the wages down by easily recruiting replacement staff.

Boots, Dixons, Marks & Spencer and Signet show higher average wages, possibly because some of their employees may not be so easily disposable. For example, some employees may require training to acquire knowledge of specific product lines (e.g. computers, spectacles, cameras, electronics equipment). Due to this investment, it may be desirable to have a higher proportion of employees on a full-time basis and also retain them at a reasonable wage. Other differences in wages may be due to the regional location of stores.

Click HERE for Table 1: Wage differentials - retailers, general

Food retailers

Major food stores are also the biggest employers of women, young people and part-time staff (shop assistants, check-out operators). In recent years, companies have also begun to employ senior citizens at low wages. Most of the staff are employed with often minimal training. Many employees work Saturdays and Sundays and also unsocial hours (e.g. night work) and staff turnover is high. But with high unemployment and lack of alternative employment for many, especially women, the food retailers can choose from a sizeable 'reserve army of labour'.

Table 2 shows that even after including extra payments for working nights and weekends the average wage in the food retailing sector is around 8,000 per annum. With 50,969, 124,172 and 25,417 employees Safeway, Tesco and Somerfield head the league with wage differentials of 130, 115 and 106 respectively.

Click HERE for Table 2: Wage differential - food retailers

Exploitation of developing countries

As previously indicated, company disclosures do not enable us to perform any check on the wage differentials in relation to non-UK based employees. This is especially relevant as in pursuit of cheap labour and lower wages many companies are increasingly locating their operations either in developing countries, or employing non-UK based staff. There are also complaints about the low wages paid by Western companies to staff in developing countries. Some pointers are, however, available from companies with large non-UK operations i.e. most of their employees are outside the UK though the core management (comparatively higher paid) tends to be in the UK. The wage differential in some of these companies is highlighted in the Table 5.

Click HERE for Table 5: Wage differential - companies with large non-UK operations.

To take an example, James Finlay has tea, flowers, rubber and timber plantations in Kenya, Uganda, Bangladesh and Sri Lanka. Its products are packaged in the UK and the USA and sold to the lucrative European and North American markets. During the year to 31st December 1998, the company's finance director received a salary package of 168,000. The company's 51,385 employees (including 49,731 working in plantations) averaged 510, which works at out just 1.40 per day.

The data from our sample show that employees in developing countries are paid considerably less even though they produce world class products, returns of investment and dividends to please the UK stock market. The actual wages paid to employees based in developing countries are probably considerably lower than the figures mentioned above, since the average amount includes the salaries of company directors and the European and North American employees.

Summary and discussion

There is considerable public concern about widening inequalities in the distribution of income and wealth. UK companies are amongst the most profitable in the world (The Times, 20 January 2000) but wage inequalities are at their greatest since 1977 (The Times, 24 February 2000, p. 30). As the availability of income shapes access to material and symbolic goods and services, there is considerable public anxiety. Many people look to the state to introduce policies to reduce or eliminate wage inequalities. However, its ability to reduce or eliminate wage inequalities is constrained by its reliance upon capitalist enterprises to generate revenues (e.g. tax on profits and wages) that are so essential for its own survival.

In the 1960s, the state sought to manage and displace the recurring crises of capitalism by imposing a freeze or strict regulation on the increases in wages and prices through the implementation of 'prices and income' policies. As part of these policies, the state encouraged the belief that by requiring companies to publish information about the remuneration of directors and employees it could monitor compliance with 'prices and income' policies. It is doubtful that the quality of disclosures ever enabled the government to monitor changes in wages and salaries of individual workers or groups of workers, especially as companies provide virtually no analysis of wages by gender, age, ethnicity or by grade of the employees. Due to the inadequacies of disclosures about share options, the information about director salaries also remains incomplete. Nevertheless, the pursuit of the 'prices and income' policies unwittingly ended up producing some data about wage inequalities in companies. We used these data to highlight wage differentials in major companies.

Due to problematic disclosures of share options and the inclusion of executive directors in the wage statistics relating to employees, the wage differentials estimated from company accounts are very conservative and likely to be understated. However, even these show that in some companies the differentials are more than 100:1. The inequalities are the highest in sectors such as retailing, food supermarkets, food manufacturers, and restaurants and leisure. These sectors are major employers of women and part-time staff. British-based companies that are major employers of the non-UK labour also exhibit high wage differentials. In many cases the wages of their staff are barely more than 1 a day.

It may be argued that due to its incompleteness the wage differentials reported here are of little use. However, the wage differentials are derived from the data published by the company itself. It has been audited by external auditors and can thus be ascribed a very high degree of 'hardness'. Admittedly, the data are in aggregate form and detailed analysis (e.g. wages by gender, age etc.) is difficult. However, the limitations are due to the social bargain struck between the state and capitalist enterprises. Under the weight of public pressure, such a bargain is capable of being (re)negotiated to secure fuller data.

Traditionally company accounts have been analysed to examine the profitability and financial position of a company (Walton, 2000). Many commentators regard published company accounts as boring, technical and grey. However, we have shown that they also provide a commentary on contemporary inequalities and can be mobilised to secure a more equitable distribution of income and wealth. The disclosures also have potential to problematise government policies. For example, successive governments have urged employees to save more and make provision for their private pensions. Some would also like to reduce public expenditure on healthcare and education and require that citizens (or consumers) should bear a higher cost. The appropriateness of such calls is questionable when it is noted that in sectors such as retailing, the average wage is only between 7,000 and 8,000 per annum. With such a low wage, people can hardly make provision for their old-age pensions. With low wages, many are effectively excluded from the decent provision of education, healthcare and other essential goods and services (Acheson, 1998; Department of Social Security, 1999).


  1. Indeed, subsequently some members of parliament used these disclosures to argue that certain companies were violating the government's 'prices and incomes policy' ((Hansard, House of Commons Debates, 9 May 1968, col. 134).
  2. By 1999, the companies were required (The Companies Act 1985, Schedule 6) to show the following: (a) Directors' emoluments, including salary fees and bonuses; (b) Gains made by directors on the sale of share options; (c) Amounts paid to directors under long-term incentive schemes; (d) Number of directors to whom retirement benefits are accruing in respect of qualifying services in respect of money purchase schemes and defined benefit schemes; (e) Pensions in excess of the pensions to which they were entitled (this includes past as well as present directors) and; (f) Compensation to past or present directors for loss of office. The Act (as amended by various statutory instruments) requires that the remuneration of the directors should be disclosed where the aggregate directors' remuneration is effectively 200,000 or greater during the accounting period. The amount of 200,000 is based on (a)+(b)+(c) mentioned above.
  3. It is estimated that this enables the major US companies to overstate their profits by 56% in 1997 and 50% in 1998 (Financial Times, 25 October 1999, p. 1). The position in the UK is unlikely to be materially different.
  4. Successive governments seem to be content to let the business elite fix the parameters of these disclosures (for example see the Committee on the Financial Aspects of Corporate Governance (1992) and the Committee on Corporate Governance, (1998)).
  5. During the 1980s, the Low Pay Unit (an organisation representing poorly paid workers), used the 'higher paid employees' disclosures' to highlight wage inequalities. The Thatcher government responded by repealing the disclosure requirements (Sikka, et al., 1989).
  6. For example, some companies disclose information about the number of share options and the exercise price (i.e. the price at which directors might exercise the option), but many failed to publish any information about the year-end share price, the variability of the share price, any time limit on exercising the option, valuation (see above) of the option or how the tax implications of exercising the options are to be managed/shared between the company and the director in question. As a result the potential gains made by directors in respect of share options cannot really be calculated in any comparable and meaningful way.


Accounting Standards Board (1994), UITF Abstract 10: Disclosures of directors' share options, London: ASB.

Acheson, D. (1998), Independent Inquiry into Inequalities in Health, London: The Stationery Office.

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Committee on the Financial aspects of Corporate Governance (1992), The Financial Aspects of Corporate Governance, London: Gee (Cadbury Report).

Committee on Corporate Governance (1998), Committee on Corporate Governance: Final Report, London: Gee (Hampel Report).

Department of Social Security (1999), Opportunity for All: Tackling poverty and social exclusion, London: The Stationery Office.

Foucault, M. (1980), Power/Knowledge: Selected Interviews and Other Writings 1972-1977 (ed., C. Gordon), Brighton: Harvester.

Hutton, W., (1999), The Stakeholding Society, Cambridge: Polity Press.

Marx, K. (1976), Capital: Vol. 1, Harmondsworth: Penguin.

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Sikka, P., Wearing, B., and Nayak, A. (1999), No Accounting for Exploitation, Basildon: Association for Accountancy & Business Affairs.

Thomson, D., (1981), England in the twentieth century, Harmondsworth: Penguin (second edition updated by Geoffrey Warner).

Trade Union Congress (1999a), Wider still and wider, London: TUC.

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Walton, P. (2000), Financial Statement Analysis, London: Business Press.

Prem Sikka

Department of Accounting, Finance & Management
University of Essex
Essex CO4 3SQ

E-mail: prems@essex.ac.uk

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