The justifications for bloated executive pay don’t stack up

By 22.07.13BlogSeptember 2nd, 2020No Comments

Luke Hildyard writes for the Guardian, summarising the flawed justifications for huge executive pay packages debunked in our paper for the New Economics Foundation

Two main arguments are put forward to justify the explosion in executive pay: bosses have a uniquely special talent that allows them to command higher pay deals; and the international competition for this talent means the UK will lose out to rival economies if top executives are not paid the top rate. In reality neither holds up to proper scrutiny.

Take Marc Bolland. At supermarket chain Morrisons, he was regarded as kickstarting a revival so great that Marks & Spencer hired him with a £7.5m signing-on fee. The stock market cheered the move, adding £600m to the value of M&S and wiping £400m off the value of Morrisons, earning Bolland the title of the billion dollar man.

Unfortunately, Bolland has not found it easy to live up to the market’s expectations, and faces constant speculation about his continued tenure. He helps to illustrate the point that the success of big business is not usually about the efforts of one individual. It is about far more than that – about the culture of organisations and the contribution of every employee towards achieving the targets set from the top.

The case of Bolland leads into the second myth about executive pay: that there is global war for talent that requires companies to match international pay deals. However, research shows that poaching top talent is not as prevalent as it might seem and that the biggest pay cheques are handed out in the US, which in turn does not attempt to recruit its talent from overseas.

High Pay Centre analysis of the Fortune Global 500 list of the world’s biggest companies found that less than 1% had poached a CEO from a foreign competitor. More than 80% of Fortune 500 Global CEOs had been promoted from internal positions.

Meanwhile, research from Cornell University found that after examining companies with a revenue of $1bn or more, the highest-paid CEOs were in the US with the UK in second place. This might suggest that companies in countries such as France and Germany should be struggling to recruit top bosses, as they do not pay US wages. But, no US company on the Fortune Global 500 company list recruited a CEO from Europe, and there are more French and German companies on the list than British, despite paying their executives less.

Academic research appears to show that promoting from within leads to better performance, the University of Delaware found that companies which promoted their CEOs from within performed better than those that recruited externally. The findings suggest that it is not innate leadership qualities – the talent myth – that make for a successful CEO, but a good understanding of the company, its culture and the challenges it faces. This results from nurture and experience, rather than an individual’s charisma.

So it not easy to prove that a global market for seeking out the best talent from a limit talent pool exists, and that this is why executive pay is rising. Yet all the figures show that the disparity between boardroom pay and those outside is widening.

In the past 30 years, pay of a FTSE 100 chief executive has rocketed from 15 times that of the average worker in 1979 to 185 times in 2011. The share of the UK’s national income enjoyed by the richest 0.1% of the population has increased six-fold, from about 1% to 6%, over the same period. The figure will reach 14% by 2035 if this trend continues, returning the UK to almost Victorian levels of inequality, with nearly one-sixth of the income of the entire country concentrated in the hands of a few thousand people, leaving the amount available to the other 60 million vastly diminished.

It is difficult to argue that this represents a fair reflection of the efforts or talents of CEOs compared with the rest of the population. However, the power and influence exerted by the corporate and financial services sector have prevented action to make pay more equal. Executives have appropriated ever more disproportionate rewards, creating an effect replicated across other senior management roles and well-paid professions including fund managers, city lawyers and consultants.

Meanwhile, low and middle earners have lost out. Again, this matters. The economy’s capacity for growth is finite, and if one small, super-rich group rapidly increases their share of income, this comes at the cost of everyone else.

(This article initially appeared in The Guardian)