The High Pay Centre said yesterday that FTSE 100 CEOs’ pay rose 10% last year to an average of almost £5.5m. It’s obvious that the left should find this a problem. I want to suggest that it should also be a problem for the right too, for four reasons.
First, high CEO pay is due in at least part to a market failure. Milton Friedman famously said: “If I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get.” This is what happens when CEO pay is set by remuneration committees. Brian Bell and John Van Reenen point out (pdf), CEOs are paid for luck and not just skill, and their pay “rises much more when the firm does well, than it falls when the firm does badly.” As Simon says, CEO pay isn’t determined by market forces but by bargaining power.
There’s also an agency problem. CEOs can and do behave in a manner that enriches themselves rather than shareholders. For example, high leverage is good for banks’ CEOs but not so much for shareholders.
There’s another form of market failure: an arms race. Firms wanting to hire a good CEO want to pay an above-average salary. But if everyone tries to pay above-average, all that happens is that the average rises.
Of course, £5.5m is tiny in the context of companies worth £30bn+. But then, so is employee pilfering. Does that thereby become acceptable?
Secondly, rising CEO pay, especially when accompanied by a degradation of “middle-class” jobs means we’re shifting from a bourgeois society to a “winner-take-all” one. This has potentially nasty cultural effects. Whereas a bourgeois society fosters virtues of trustworthiness and prudence, as Deirdre McCloskey has shown, a winner-take-all society might reward vices such as ruthlessness, narcissism and deceitfulness.
Thirdly, it’s possible – I put it no stronger than that – that high CEO pay is bad for overall productivity. “Wage inequality has a negative effect on a country's labour productivity” concludes (pdf) one study. One mechanism here (of several) is the messiah complex. If superstars are paid fortunes relative to other employees, those employees will tend to look to the star rather than take initiative themselves. As Jeffrey Butler’s experiments have shown, pay affects beliefs about ability: the low-paid come to believe they have little skill whilst the high-paid become overconfident – and of course, overconfidence itself can lead to disastrous decisions.
It’s a simple fact that rising CEO pay in recent years has been accompanied by stagnant productivity. Of course, there are countless possible reasons for the latter, and correlation isn’t causality. But can we really be sure the two are unrelated?
Finally, there’s a danger that rising inequality will produce a nasty backlash. We know with some confidence that inequality tends to create distrust. And combined with stagnant incomes, it also breeds intolerance and small-mindedness. These might easily create hostility towards a market economy. We’re seeing this with support for Trump’s hostility to free trade. But who knows where else it might lead? Political instability is no friend of business or free markets.
My point here is a simple one. There are good reasons why Theresa May has spoken of the “irrational, unhealthy and growing gap” between bosses’ and workers’ pay. It’s because such a gap threatens the values and interests of many conservatives.
Many Marxists are relaxed about this; it just confirms our view that capitalism is a device through which the rich exploit others. Should rightists really also be relaxed? I mean, they can’t all be just hypocritical shills of the rich, can they?