The economics of BBC pay

The BBC’s publication of a list of its best-paid talent has triggered many subjective views on who’s overpaid. But there’s another issue here, namely: how can we understand what’s going on?

The natural framework for doing so is a bargaining model. This says that pay depends upon just a handful of factors*:

 - Fall-back options. For the BBC**, this is what it would get if it employed the next-best alternative to (say) Naga Munchetty rather than Ms M herself. For Ms M, it’s what she’d get if she worked elsewhere. Obviously, the better your fall-back option, the better you'll be paid, other things equal. 

 - The joint surplus.  The is the pay-off to both parties of the match between the BBC and Ms Munchetty, relative to their fall-back positions. This pay-off isn’t necessarily wholly monetary. For the BBC, it might be the prestige of a quality programme, or the job security commissioning editors get from high viewing figures. And for the talent it can be the platform it gets; being on BBC Breakfast can be a springboard to getting onto Strictly, for example.

 - Bargaining power. How much of this surplus can one extract for oneself?

Take, for example, Peter Capaldi, who earned less than £250,000. This doesn’t seem much, given that the joint surplus is huge – Doctor Who is a worldwide hit – and Capaldi’s ability so great as to give him lots of outside options. But it’s more understandable, once we recognise two things. One is that the BBC’s fall-back position is strong: Doctors are replaceable and the format’s success doesn’t depend upon the actor – and that being the Doctor gives Capaldi a fantastic basis for negotiating his next job; it's wroth being temporarily underpaid for that.

Or take Alan Shearer. His £400k+ wedge looks like he’s having a laugh. But it’s the result of his having a strong fall-back position. He could get big money from Sky or BT Sports; given the rubbish the latter employ, this is a credible threat. Or given his wealth, he could simply walk away: this is another example of a Matthew effect. This gives him a high wage. You might think this is offset by the BBC’s strong fall-back position: anybody can talk shit about football. This is not so. Few have the credibility as a pundit that comes from being the Premier League’s top scorer; BBC bosses evidently value that highly, and so have a poor fall-back position.

Or consider Helen Castor (as I often do). Based on talent, she should be high on the list. But she’s not. One reason for this is that highbrow history shows on BBC4 have a small joint surplus. Another is that she lacks a good fall-back; there are few good history programmes on other channels and Suzannah Lipscomb has bagged them.

I reckon the bargaining framework helps illuminate what’s going on. But there are (at least) four wrinkles:

 - In many cases, the BBC’s fall-back position is weak, or at least it believes it to be so. The reason for this was pointed out by Marko Tervio. What’s scarce, he says, is not so much talent as proven talent. You might think you could do a good job of interviewing a politician live on air. But unless you’ve done so, you can’t prove it. And few people have done so. This means BBC bosses are scared to replace Andrew Neil or Eddie Mair – hence their big money. Similarly, some radio presenters are well-paid, because bosses doubt whether their replacements will get so many millions of listeners.

 - Compensating advantages. As Adam Smith pointed out, differences in wages are often just compensation for other advantages. Breakfast presenters, for example, must be well-paid to compensate for having to get up so early.

 - Comparisons matter. Our well-being depends not just upon our income but upon how much we get relative to others (pdf). This means that unless the BBC wants some of its presenters to look and sound miserable, it must pay them something like their colleagues, even if their objective talents don’t necessarily merit such rewards. Having decided to pay Alex Jones a good wedge, the BBC thus gives Matt Baker a fortune. (This doesn’t, however, seem to have worked in John Humphrys’ case).

 - There’s an idiosyncratic element to bargaining power. Anybody who’s worked in investment banking knows that similar talents and circumstances co-exist with huge differences in pay. In particular, we know that – in least in some circumstances – women get worse (pdf) deals than men (pdf).

It is, therefore, a little odd that the BBC should refer to the list as payments for on-air talent – because talent is only one factor that determines pay.

* I'm drawing here on Ch 5 of Sam Bowles Microeconomics, one of the best economics textbooks

** I’m speaking loosely here. By BBC, I mean the specific BBC bosses who hire the talent, and their interests mightn’t be aligned with the corporation’s or the viewers’.  

Comments

[Mike Berry]

I think you are missing a broader conception of the 'joint surplus'.

The BBC is able to justify the retention of the license fee because it can maintain a particular audience share. Should that fall precipitously - and some might believe the loss of key 'talent' may erode the audience base, there will be increased pressure from politicians and the Press to scrap the fee and move to a subscription model.

[Luis Enrique]

On this topic, you may like this recent survey

https://www.london.edu/faculty-and-research/academic-research/e/executive-compensation--a-survey-of-theory-and-evidence#.WW9dbBnTXqA

[aragon]

The whole sector (Media and Sports) is inflated by monopoly profits buy capturing the consumer surplus and positive externalities.

The whole foundation of the industry is a monopoly on distribution in the form of copyright and mass distribution with access to the broadcast bandwidth a limited and regulated commodity.

Even the Unemployed are subject to the BBC licence fee flat tax, and whom have very little alternative sources of entertainment.

The whole industry is about limiting access to a resource that has a zero cost of copying, and distribution. Not to any extent based upon popularity, merit or quality (as the choice is so narrow - four channels plus repeats or movies).

Popularity is defined within very narrow limits, would Hollywood be popular (given few studios and it's output) if a wider range of material was available?

How many Marvel spin offs and remakes can the public endure? The only talent on show, is for self-promotion and marketing.

The copyright lobby is as strong as ever and using vast funds to lobby for the distortion of society and to reduce privacy and freedom. e.g Digital Economy Act, and the nonsense on copyright coming (previous and current) from Europe:

https://www.techdirt.com/articles/20170714/00301537786/latest-eu-parliament-votes-copyright-fuck-public-give-big-corporations-more-copyright.shtml

[Andrew S]

That;s a helpful framework, but I have doubts whether it wholly explains (or excuses) the flagrant gender gap. It makes me wonder whether the BBC is getting away with discriminating against women across its entire workforce

[wheezy]

Isn't the Dr Who argument (one I also believe) slightly confounded by the recent history of another franchise with similar properties. E.g. Bond and its current portrayer (assuming we belief the press coverage and pay of the current 007).

Presumably the different production set ups (e.g. BBC vs ANOther) for these similar brands create different constraints in the actors bargaining position as well as a strong fall back option.

[Mark]

Maybe explains Humphreys' antagonism to egalitarian politicians. At that rate he should be a lot sharper at interviewing rather than indulge in false traps and mindless baiting. A lot to pay for a pleasant voice saying so many unpleasant things.

[Dipper]

I thought the list quite revealing.

It seemed at first glance that if you mapped the salaries onto the key times for the BBC in the weekly schedule there was a good match. Radio 2 is the most listened to radio, BBC 1 at tea time or Saturday evening the most watched, hence big pay for Radio 2 DJs and actors in East Enders or Holby City.

In which case the stand out salary is Ken Bruce. He should earn far more. And not just because I like his show.

[Keith]

The sex discrimination has no justification and is sexism. The rest of the pay differences seem to have a big element of accident and arbitrariness. Life is all about what you can get away with it seems. And apart from acquiring testicles what you get away with is luck.

[derrida derider]

"Anybody who’s worked in investment banking knows that similar talents and circumstances co-exist with huge differences in pay."

True pretty well anywhere where productivity is hard to measure, which means inter alia pretty well all management jobs.

Simple luck - being in the right place at the right time - is grossly underestimated as a determinant of wages.