Should we cap bosses' pay?

As it seems unlikely that Vince Cable’s plan to empower shareholders will greatly rein in bosses’ pay, George Monbiot is proposing a simpler alternative - a maximum wage law. I’m not sure that either proposal is good enough.

Granted, they might be. There’s an element of the arms race about bosses’ pay. It’s possible, therefore, that anything that can achieve co-ordinated control of pay will reverse this. If company A knows that company B is not paying silly money (either because of a law or shareholder activism), then it won’t do so either. The bubble thus bursts.

And this mightn’t have adverse effects on incentives. Insofar as CEOs’ demand for high pay is a positional good - they want better pay than their rivals - anything that curbs their rivals’ pay will curb theirs.

So far, so good. But there’s an offsetting danger.

The problem is that CEOs are status-seeking animals; this is why they try to get the top job. If they cannot achieve high status through their salary, they might therefore try to achieve it by other means - for example by building corporate empires, by pursuing non-financial perks such as even more lavish head offices, company jets and suchlike. Or they might simply appropriate corporate assets for themselves; remember, the reason why high pay is necessary now is to bribe them not do so this.

In this sense, capping pay might well have adverse effects. As evidence, remember the 1970s. When high tax rates deterred bosses from getting more money, the result was overly large and inefficient conglomerates, and a management obsessed by status - the legendarily key to the executive toilet - which created a poisonous industrial relations atmosphere.

My point here is that high CEO pay is not the disease, but the symptom - of the fact that CEOs have too much power. Treating the symptom is not sufficient, and might even be counter-productive. What is needed is to rein in bosses’ power. And given the difficulties of getting shareholders to do this - asymmetric information, the problem of collective action and so on - it might well be that workers are better able to do so. And I’m talking about far more than merely having employee representation on remuneration committees.

What we’re seeing with the debate about bosses’ pay is, I fear, a similar thing to what we saw with Clegg’s call for more employee share ownership. There’s a tendency for liberals and the “moderate” left to think that a halfway house between full capitalism and full socialism is better than both. This is a prejudice which is not always or necessarily true.

Now, you might object that more radical means of curbing bosses’ power are just not feasible right now, whereas limits on bosses’ pay are.

True. But what’s feasible is not always what is efficient.

Comments

[Frank in midtown]

It seems to me that the unentended consequence of SOX is an advantage to PE ownership. PE ownership is likely to be considerably more involved than the Mutual fund guys. Mutual funds make horrible owners.

[Account Deleted]

A pay cap is naive because executives will simply bypass it - e.g. by contracting through personal services companies so their pay is treated as a 3rd party expense.

A higher rate of tax would be more effective, though, as you note, this can have unintended consequences. It might be possible to prevent inefficient conglomerates by gearing corporation tax to size or span.

The issue of CEO power, and by extension the entire hierarchy of command and control within a business, is central. We need to consider that new-fangled democracy thing.

[Metatone]

I think the dogma around "inefficient conglomerates" needs more careful analysis. Most of the evidence presented is that share prices of conglomerates exist at a discount to the individual parts. But that's not necessarily a meaningful measure, since share prices in this era reflect the ability to hit earnings forecasts, rather than actually reflecting earnings transparently.

GE and IBM seem to have done ok, despite being conglomerates in the RBV sense.

Further of course, raising an altar to efficiency rather than (for example) effectiveness or resilience needs examination, as it's based on Modigliani-Miller which rests on conditions which don't hold in today's market.

[Richard Gadsden]

Have to agree with Marstoelbow here - we should try that democracy thing.

What impact would mandating STV* elections of the board have?

That would guarantee minority representation on the board, and requiring annual re-election would make directors more responsive to the electorate.

Then, all you need to do is fix the electorate. The obvious approach is to state that only natural persons can vote. Corporate persons are representatives of groups of natural persons, so you could just require corporate persons to delegate their voting rights back to the ultimate beneficial owner.

Only the corporate persons that don't have a beneficial owner would be able to vote their own shares, and that would have to be in accordance with the aims and objectives of the corporate person, rather than mere profit (ie Friends of the Earth would have to vote on the basis of what was the most environmentally-friendly choice).

Once you've got a functioning electorate, you could then start giving them more decisions. Sod remuneration committees: require a vote on pay and directors get £1pa if there isn't a majority of shares (ie, non-votes don't authorise any pay at all).

* STV is a PR system that doesn't need parties or party lists, unlike most PR systems, so it guarantees minority representation

[David Hurley]

Everyone wants to earn and earn more these sought of things will force them to try next best thing that is to swithover or find other way of income, which is not good for an organisation.