Apologists and beneficiaries of huge
executive pay packets talk of the ‘rate for the job’, and the ‘commercial
realities’. Opponents and critics talk of greed, unfairness, and the
exploitation of the weak by the strong. The former say the latter don’t
understand how markets work. The latter say the former refuse even to
acknowledge the possibility that their sense of entitlement is exaggerated.
It is a dialogue of the deaf. The
protagonists transmit, but don’t receive. There seems to be no common ground on
which to debate and thereby reach some kind of resolution to one of the most
important socio-economic issues of our
age.
Two articles in the Financial Times of June 10, 2013 exemplify the great divide, and
inadvertently suggest how it might be bridged.
The first on page three in the main paper
reports that ‘The median total remuneration of FTSE 100 chief executives rose
8% [about six times the growth in average earnings in the UK economy as a
whole] to £3.7m last year’, as higher share prices ‘drove a windfall from long-term
incentive plans.’ The figures, from proxy voting agency, Manifest, and
remuneration consultants, MM&K, show that the growth of CEO earnings has
continued unabated, throughout the traumas and recessions of recent years that
some, myself included, hoped would put a brake on the executive pay explosion.
Between 1998 and 2012 the average pay of FTSE 100 bosses grew from 47 times to
133 times their employees’ average earnings.
There is no reference in the page three
report to the John Authers column on page 20 in the Companies section of the
FT, head-lined: ‘Elitist systems carry seeds of their own destruction’ and
Authers makes no reference to the page three piece. Once spotted, however, the
connection is obvious. The three books Authers refers to - Why Nations Fail, by Daron Acemoglu and James Robinson, When the Money Runs Out, by Stephen
King, Balance – The Economics of Great
Powers from Ancient Rome to Modern America, by Glenn Hubbard - all argue,
says Authers, that ‘political systems that intensify inequality or that work
exclusively for the benefit of particular groups, carry with them the seeds of
their own destruction.’ History is littered with examples: the Bourbons, in
France; the Romanovs, in Russia; the Stewarts, in Britain; the Pahlavis, in
Iran; and more recently dictators in North Africa.
The three recently published books Authers
mentions echo a warning in my own book, Business
at a Crossroads. The crisis of corporate leadership (Palgrave Macmillan,
2009), in which I argued that very high levels of top executive pay are
undermining what I called the ‘liberal-capitalist consensus’.
A shared wish for political stability is the
common ground for the apologists for, and critics of, very high levels of
executive pay. Both sides in the debate have an interest in ensuring the seeds
of self-destruction in the high, still growing levels of inequality generated
by the executive pay explosion do not germinate and lead to social instability.
Social instability impoverishes people and disrupts the efficient working of
the wealth creation process from which senior executives skim such a
disproportionate share.
It’s on this common ground, the common desire
for stability, where the essential question must be settled.
Is the great wealth of company executives a
creature of capitalism itself; or is it rather a creature of inefficiencies in
the market for senior executives?
If the indulgence of natural human impulses
in a capitalist system leads inevitably to enormous disparities in income and
wealth then such disparities, and the sense of unfairness they foster, are the
price we have to pay for the superior allocative efficiency of the free market
system. Until, that is, the seeds of self-destruction germinate, and ordinary
people demand another, less efficient, but more equitable system.
If, as we should all hope and as actually
seems more likely, given the adaptability that capitalism has demonstrated in
the past, the fault lies not in the system itself, but in market
inefficiencies, then the executive pay problem is corrigible and the market
for executive talent could, in time, become
as efficient as the market for Premiership footballers.
Email us at: info@cceg.org.uk
[The views and opinions expressed in this blogs by guests or members of the CCEG are those of the author, and not of the CCEG or the University of Northampton Business School]
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