Head-to -Head

Should ex­ec­u­tive pay be capped?

Business Spotlight - - CONTENTS - AD­VANCED AU­DIO

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.

Big dis­tance: your boss and you?

LUKE HILDYARD is direc­tor of the High Pay Cen­tre, an in­de­pen­dent think tank con­cerned with pay, work and in­equal­ity (high­pay­cen­tre.org)

BEN RAMANAUSKAS is a pol­icy an­a­lyst at the Tax­pay­ers’ Al­liance, which cam­paigns for tax and pub­lic ser­vice re­form (www.tax­pay­er­sal­liance. com)

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