Head-to -Head
Should executive pay be capped?
YES “It’s not the case that the highestpaid CEOS are the best” Luke Hildyard
Big increases in executive pay have not been accompanied by a corresponding improvement in company performance. Increases have been driven by a move towards American-style bonus and incentive payment, based on the idea that the success of businesses is almost entirely driven by one or two individuals at the top. In reality, success is more of a collective effort and shaped by the wider economic context, policy decisions and societal trends.
Executive pay is set by remuneration committees, mostly made up of executives or former executives, all of whom benefit from a culture of high pay. It’s certainly not the case that the highest-paid CEOS are the best. Look at the various scandals and corporate governance disasters at firms like BP, with very highly paid CEOS. Research shows that lower-paid CEOS actually generate slightly more economic value.
High executive pay and bonus payments in the financial services sector have driven economic inequality. In the UK, the top one per cent take a larger share of total income than elsewhere in Europe. CEO pay has rocketed from around 50 to 60 times that of the average UK worker at the turn of the century, to 150 to 160 times today. That’s money that could be going into the pockets of low and middle-income earners. Raising living standards leads to more social cohesion. Historically, that’s always been achieved through economic growth and innovation, and by ensuring that the proceeds are distributed more fairly. Reducing excessive executive pay ought to be one of the top priorities of policymakers.
In the US, Sam Pizzigati has promoted the idea of a maximum wage. Even if executive pay is not capped at a fixed multiple of the average worker, it should be disclosed. Many companies are dependent on the state for funding. Defence contracts, public service outsourcing, grants, incentives, rebates and business leaders accompanying the prime minister on overseas visits — that support could be made conditional on reforming pay structures, reducing the gender pay gap, giving workers representation on boards and in the pay-setting process. A bit of real-world perspective comes into it when people talk about £5.6 million pay packages, which is the average for a FTSE 100 CEO.
NO “Top executives deserve their high salaries” Ben Ramanauskas
The outcry against high levels of executive pay is wrong for two main reasons. First, top executives deserve their high salaries because they are worth a lot of money to their companies. When a CEO steps down, the market reacts, for good or ill. When Harriet Green left Thomas Cook, £400 million (about €450 million) was wiped off the market capitalization of the firm. Burberry’s value dropped by £536 million after Angela Ahrendts left. Apple’s value decreased by five per cent when Steve Jobs died. Conversely, when Steve Ballmer resigned from Microsoft, the firm became 7.5 per cent more valuable.
Similarly, when a good CEO becomes more involved with the running of a company, or if an incompetent leader resigns, then the market responds again. For example, the value of Tesco increased when its chief executive announced that he would take a more active approach to managing the company. This is not only true of the share price: a chief executive leaving can have a significant effect on the performance of a business. A 2010 study found that sales growth and profitability are negatively impacted by the sudden death of a CEO or one of their family members. The researchers later found that this also happens when a chief executive is hospitalized. There is compelling evidence demonstrating that firm performance increases when the CEO is perceived to be more involved in the running of the company.
The second reason why calls to cap executive pay are wrong is because what a company chooses to pay its top executives is, quite literally, none of our business. These organizations are not owned by the public, the government or the media. They are owned by shareholders. Private property rights are, or ought to be, sacrosanct. Property rights have been defended and celebrated throughout history by some of the greatest thinkers. Aristotle’s Politics (fourth century BC), John Locke’s Two Treatises of Government (1689) and Robert Nozick’s Anarchy, State and Utopia (1974) all articulate the importance of private property rights. It is up to owners of property to decide what to do with it, nobody else. Companies belong to shareholders, who are the ones who invest their money and bear the risks. If this involves them paying their CEOS vast sums of money, then that is their right.