10 May 2007
Executive Pay and Competition
Today (10th May 2007) the Financial Times published a letter of mine about Executive Pay.
The letter can be accessed (by subscribers) on the Ft.com website at: http://www.ft.com/cms/s/0977b7b2-fe93-11db-bdc7-000b5df10621.html .
The letter was writen in response to an article by Clive Crook (FT 3rd May 2007) which can be accessed (by subscribers) at http://www.ft.com/cms/s/1850f93a-f928-11db-a940-000b5df10621.html .
This is the text of my letter:
Sir, Clive Crook makes an interesting analysis of the proposition that America's rewards-for-merit contract is breaking down ("America frets about executive pay", May 3).
He refers to Prof Lucian Bebchuk's evidence that patterns of top pay reflect an abuse of management power. Mr Crook appears to accept these arguments in specific cases, but seems reluctant to accept that there is a system-wide problem, because market forces should be expected to deliver appropriate outcomes on executive pay.
If there was a well-functioning competitive market in executive talent then we would expect executive pay to reflect changes in supply and demand in that market; more big companies needing leaders would push pay upwards, more suitable candidates would push pay downwards. Instead, as Mr Crook observes, the growth of CEO pay appears linked to the growth of the companies they manage, and has very little to do with supply and demand. Mr Crook believes that this anomaly can be explained because the CEOs of big companies are not readily interchangeable.
Clearly they are not readily interchangeable, but this fact increases the market power of the incumbents. It should make us more rather than less concerned about the abuse-of-power hypothesis.
Clearly, many people compete to become CEO of large organisations, and it is very difficult to secure such jobs. However, all the competitors benefit if executive pay moves generally upwards, and collectively they have the power to ensure that it does.
This kind of competition has nothing to do with the economically efficient competition that squeezes out surplus costs for the public good. There is indeed a very serious system-wide problem.
Patrick Gerard
As the above letter suggests, there are serious problems with the way that competition works in the market for executive talent. This matter should be investigated by competition authorities. I myself have raised the matter with the Office of Fair Trading in the UK (follow the link "Competiton Law" in the left hand column) and the US (see blog entry for 3rd August 2006).
The letter can be accessed (by subscribers) on the Ft.com website at: http://www.ft.com/cms/s/0977b7b2-fe93-11db-bdc7-000b5df10621.html .
The letter was writen in response to an article by Clive Crook (FT 3rd May 2007) which can be accessed (by subscribers) at http://www.ft.com/cms/s/1850f93a-f928-11db-a940-000b5df10621.html .
This is the text of my letter:
Sir, Clive Crook makes an interesting analysis of the proposition that America's rewards-for-merit contract is breaking down ("America frets about executive pay", May 3).
He refers to Prof Lucian Bebchuk's evidence that patterns of top pay reflect an abuse of management power. Mr Crook appears to accept these arguments in specific cases, but seems reluctant to accept that there is a system-wide problem, because market forces should be expected to deliver appropriate outcomes on executive pay.
If there was a well-functioning competitive market in executive talent then we would expect executive pay to reflect changes in supply and demand in that market; more big companies needing leaders would push pay upwards, more suitable candidates would push pay downwards. Instead, as Mr Crook observes, the growth of CEO pay appears linked to the growth of the companies they manage, and has very little to do with supply and demand. Mr Crook believes that this anomaly can be explained because the CEOs of big companies are not readily interchangeable.
Clearly they are not readily interchangeable, but this fact increases the market power of the incumbents. It should make us more rather than less concerned about the abuse-of-power hypothesis.
Clearly, many people compete to become CEO of large organisations, and it is very difficult to secure such jobs. However, all the competitors benefit if executive pay moves generally upwards, and collectively they have the power to ensure that it does.
This kind of competition has nothing to do with the economically efficient competition that squeezes out surplus costs for the public good. There is indeed a very serious system-wide problem.
Patrick Gerard
As the above letter suggests, there are serious problems with the way that competition works in the market for executive talent. This matter should be investigated by competition authorities. I myself have raised the matter with the Office of Fair Trading in the UK (follow the link "Competiton Law" in the left hand column) and the US (see blog entry for 3rd August 2006).
Labels: Bebchuk, CEO, Clive Crook, Competition Law, power
