Bosses as robber barons

News that the pay of FTSE 100 chief executives rose by 12% last year reminds us that the bosses' pay con-trick is still working well.

A couple of recent papers corroborate my view that it is indeed a con.

First, Thomas Lambert and Eundak Kwon show that movements in top US incomes since 1929 are correlated with both the political environment - "neoloiberalism" favouring high pay - and with the rate of surplus value, defined as the ratio of non-wage incomes to the wages of "productive" workers.They say:

The Marxian concept of the rate of exploitation appears to have some statistical validity.

Secondly, Olivier Fournout describes how the description of the CEO as hero in many management books resembles the depiction of heroes in many films. In both, our hero assumes a role, is reasonable, sensitive and listening, and unorthodox and creative - and takes risks. He writes:

The figure of the hero promoted by management literature and the American film industry is—at a structural level—the same.

This, of course, shows how the position of the boss is sustained by an ideological construct; the pretence that the boss is like a Hollywood hero serves to legitimate his role and his huge salary, just as stories of medieval chivalry helped to legitmate robber barons.

You might object here by pointing to work by Brian Bell and John van Reenan, which finds a strong correlation in recent years between UK CEO pay and performance:

Senior management appear to have pay that is strongly associated with various measures of firm performance...A 10% increase in firm value is associated with an increase of 3% in CEO pay but only 0.2% in average workers’ pay. Falls in firm performance are also followed by CEO pay cuts and significantly more CEO firings.

However, this finding does not reject the possibility that bosses, in aggregate, are exploiters.

To see what I mean, imagine a feudal society in which lords exploit peasants but claim, in exchange, to offer them protection. In this society, the lord who fails to offer protection might well suffer badly, as rival lords attack his land and rob both him and his peasants, whilst the successful lord who protects his peasants would see his wealth grow as he usurps other lords. There will then be a strong correlation between lords' performance and reward. But the lord-peasant relation will be exploitative.

A link between individual ability and performance is entirely consistent with an aggregate relationship which is unjust. 

Comments

[Andrew]

Absolutely!

Whether someone's pay correlates closely and positive with performance has no implications for the question as to whether they deserve that pay level or performance multiple.

Complaining that CEO's high pay is not related to performance is a red herring. I don't particularly care whether it is if the level is extortionate and more to the point not an efficient market price for those skills.

[Paul Walker]

"the ratio of non-wage incomes to the wages of "productive" workers."

What is a productive worker? What is an unproductive worker? And why do we care about the ratio mentioned above?

[Account Deleted]

When a CEO is fired for taking the share price south, the replacement is not usually recruited at a salary lower than their predecessor. The CEO-hero is an external factor, so the business must pay the market rate.

This market rate conventionally includes a handsome payoff as a contingency. Thus each failure leads both to the ex-CEO collecting and the successor enjoying the benefits of aggregate package inflation.

The market in CEO talent is a fiction that leads to this asymmetric relationship between performance and reward. The executive class is, in loose terms, an organised conspiracy. Less robber barons and more of a mafia.

[Anonymous]

@Paul

All workers are productive otherwise they would not be employed. Surplus value is the amount workers do not receive for the work they do. To operationalise this concept I imagine surplus value is determined by comparing the market price of a worker's products with the wage they actually receive for the time those products were made. So a call centre worker resolves 50 queries in an 8 hour day and is paid £6 per hour. The market value of each resolved query is £2 so the surplus value is £52 and the rate of exploitation is the (£52/£48) x 100 = 108%

We care about the ratio because it determines a firm's profitability (and CEO remuneration).

[Tom]

CEOs are, generally, worth it. To their shareholders, who pay them. For making the difficult strategic decisions to grow the profits and the value of shares. As firms grow larger thru globalization, the "winner take all" benefits go to the winners.

As more people in the world watch the same blockbuster movies or buy the same music, the top stars make far more than most folk.

Taxes based on "profit", which can be and is creatively accounted, assist in relating CEO pay to shareholders.

Were there higher taxes based on greater inequalities of pay, there would be less inequality.

Would you be willing to reduce corporate income tax for a revenue neutral corporate inequality tax? I would.

[Will]

I think that if you're going to specify "productive", you need to be more clear what you mean. Are you dredging up the classical concept? And if so, which version? I would assume you do not, for instance, classify only agricultural laborers as "productive."

[Keith]

To decide the proper renumeration to pay any one, requires a theory about it that stacks up. Is there such a theory?

You could say that the gains derived by the workers or consumers should determine the rewards of those in executive positions. How would that be calculated? To criticise the size of executive pay objectively some such method is needed. Or you end up picking numbers out of the air.

[james higham]

Aug-Oct should be interesting this year.

[Sally]

Really intriguing post, such deep analysis of the situation with so little words, this is what I call quality writing, you don't need thousand words to say what you want.