Bosses pay: the right's problem

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.

Now, against these mechanisms you might try some defences of high pay – though Paul Marsland and Tom Powdrill have shed doubt upon those.

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?

Comments

[Mark]

There are two more reasosn why the right (and indeed everyone else) should be concerned about wage inflation among listed-company CEOs, and the one percent generally.

First, while they represent a small proportion of the economy, their growing incomes enable them to own a large and rising percentage of the country's net worth. As their bank balances swell faster than those of the rest of the population's, so their ability to bid up the value of assets and positioned services is enhanced, in turn diminishing the capacity of the rest of us to compete.

Whether it's London property, private school education, decent legal representation or anything else the middle classes until recently believed they could provide for themselves and their offspring, increasingly the global elite has bid it out of reach. This reduces social mobility and equity.

Second, as the labour of FTSE100 CEOs becomes increasingly expensive, so it becomes affordable to fewer firms. VC-backed start-ups, small-cap growth businesses and social enterprises that could once afford top talent increasingly can't. This is bad for all of us as those firms create disproportionate amounts of jobs, tax income and common goods respectively.

[BCFG]

Another reason we should be concerned by this is that what makes good policy for the company is not necessarily good for the customer. So for example, sacking workers or reducing their terms and conditions just passes the cost to society at large. Also, for example, if in order to be successful a utility company needs prices to be sticky going down and fluid going up then the company can can profit from this but the consumer base could end up in fuel poverty. So what is good for the company is bad for everyone else!

We should also challenge the Adam Smith Institute ideology that the reason someone gets paid millions is because the CEO is so fantastic they are simply worth this amount. The Adam Smith Institute are nothing but apologists for Kleptocracy. And Kleptocracy is what we have.

The reason the right cannot challenge the pay of directors is because in the final analysis the right wing argument comes down to just one thing, these people are simply better than you mere mortals and deserve all they get. If they concede on high pay they basically have to reject their whole ideological foundation.

So when you scratch the surface the right are nothing much more than shills for the rich.

[Jeffrey Stewart]

First, I thought you read and assimilated Marx. If so, then you're fully aware that "market failure" is nonsense.

Second, you write, "Many Marxists are relaxed about this..." Really? How many Marxian economists do you know? How many do you correspond with? Please let me know if this is just a slur against Marxian economists or you actually have survey data to support your assertion.

[SheepCat]

What I don't understand about high CEO pay is that executives don't exclude each other in quite the same way as footballers do:
Can a single £5m executive really achieve more for the company than a team of 10 x £500k executives?

It might be argued that there has to be one person with whom the buck stops.
This may or may not be true (I'm not an executive). But we don't even seem to hear much about companies trying out more consensual decision-making.

The cynic might say that the reason a single £5m executive is so effective, is that he shmoozes with his old Eton chums, some of whom are now running the country, and is therefore able to influence the lay of the playing field.