Explosion in executives’ pay is not merited
‘IT IS glorious to get rich.” So said, of all people, a former leader of communist China. It is hard to imagine any Irish politician saying such a thing. Despite the self-proclaimed pro-business inclinations of most of our elected representatives, the lionising of wealth creation is not something one hears frequently from those in Leinster house.
Nor is it much lauded in Liberty Hall, the spiritual home of Ireland’s trade union movement and a place not known as a bastion of militant capitalism.
That was reflected in a study of pay for those at the top of large companies and organisations in Ireland, published on Tuesday by the Irish Congress of Trade Unions. Although largely fact-based, the study suggested that the inhabitants of Ireland’s corporate boardrooms may not be entirely deserving of their ever larger pay packets.
That trade unions bash company bosses over their pay is as predictable as bosses bashing unions over strikes. And just as any report by an employer’s organisation on industrial relations issues would have to be taken with sprinkling of salt, so too does a report by ICTU on executive remuneration.
But as Tuesday’s study is most simply a setting out of facts, rather than a policy position, that cautionary caveat is much less relevant than it might usually be. More than that, the report should be welcomed, as it highlights a serious issue that has not received nearly enough attention in Ireland.
“The salary of the chief executive of a large corporation is not a market award for achievement. It is frequently in the nature of a warm personal gesture by the individual to himself.” The report opens with this pithy quote from the great 20th century economist, John Kenneth Galbraith.
If what Galbraith wrote decades ago had some truth then, it is even truer now because pay rates for top level corporate managers in most countries have been rising much more rapidly than average pay rates in recent decades.
The Galbraith quote above captures a core issue: the scope for bosses to decide, to a very considerable extent, how much they pay themselves. They can do so because the ownership of big companies, most of which tend to have their shares bought and sold on stock markets, is usually highly fragmented.
As a result, the owners often have limited power to stop managers being excessively generous to themselves.
This also has knock-on effects. It drives pay inflation for managers below chief executive level. It spills over to executive pay levels in privately owned companies, non-profit organisations and state-owned entities (if such organisations want to get the best managers they have to compete with listed companies). All this contributes to the seemingly unending cycle of excessive wage inflation for executives.
Dr Peter Rigney, the trade unionist who authored the study, trawled through the annual reports of 21 companies listed on the Irish stock exchange.
He found that the average total remuneration of the top executives in these private sector companies was just over €2m in 2015. That amounted to a staggering 88pc increase on 2009.
This near doubling of top boss pay happened at a time when there was next to no inflation. Over the first half of the period the economy was in a deep slump, not something normally conducive to pay increases, for executives or anyone else – as it happens, average pay levels across the entire economy have been stagnant for almost a decade.
None of that is to say that successful and talented people should be paid a pittance. If someone starts a business and takes a risk with their own money, then it is indeed glorious for them to get rich. There is no downside for anyone.
But corporate executives who are appointed to their positions as professional managers have more in common with bureaucrats than with entrepreneurs. Both manage people, costs and revenues. Neither puts their own cash on the line.
Managing big organisations is certainly difficult and pressured. Most of us do not have the skills, stamina and drive to run a large organisation effectively. There is nothing wrong with those who have the ability to do so being decently remunerated.
But the general explosion in corporate pay for those at the top in recent years – internationally and in Ireland – cannot be justified on any grounds. Corporate bureaucrats who earn millions of euro annually, and sometimes much more, are often richer than people who come up with the ideas to drive wealth creation and who risk their own money to make a profit on their ideas. That can only reduce wealth creation in the long term by luring people of ability and drive into management and away from entrepreneurship.
Multimillion pay packets also mean that there is less profit to plough back into the business. The knock-on effect for the public and not-for-profit sectors has implications for taxpayers and charitable givers respectively.
Another downside to the widening gap in pay within companies is the wedge it drives between managers and employees.
Dr Rigney’s report compares the pay of CEOs and the average worker in the organisations in his study. He finds, unsurprisingly, that the gap increased in most of the private companies listed on the Irish stock market in the six years to the middle of the decade. In three companies, the CEO earned 100 times or more what the average employee made in 2015.
Such a chasm between managers and those they manage cannot be healthy. Nor is there any reason to believe it reflects changes in the relative contribution different employees make to their companies.
HOW can this problem be addressed? For a government in one country to take action to curb excessive executive wage inflation would risk having companies move operations abroad. That said, the report’s proposals – for more transparency in pay setting, for the Low Pay Commission to monitor the widening executive pay gap and for a higher tax rate on incomes above €1m – deserve serious consideration.
There has been a lot of illinformed nonsense written and broadcast about income and wealth inequality in Ireland. Tuesday’s report is very different. It is a serious piece of research casting a light on an important and understudied phenomenon. It deserves to be read widely at www.ictu.ie.