13 June 2008
Rise in executive pay - is it sinister?
Letter to "The Economist", 13th June 2008 (not published).
Dear Sir,
Executive Pay – Let the fight begin (Economist 14th - 20th June 2008 – page 18)
Your leader on executive pay, surprised me with the comment, “Managers’ pay has grown faster that workers’ pay, but the reasons for this are not sinister. Whereas workers’ pay depends on the labour market …, managers’ bonuses are chiefly tied to returns on capital”
The thing which does appear “sinister” is that executive pay appears to have no relationship to supply and demand in the market for executive talent. The difficulty of recruiting and retaining executive talent in a highly competitive international market is often cited as a reason for increasing executive pay. However if prices in that market are not related to supply and demand then that market cannot be competitive in the sense that leads to economic efficiency.
If prices in the market for executive talent are not driven by supply and demand then we have to ask what does drive them. The most likely answer is the market power of directors of public companies, who are both the principle suppliers and principle purchasers in the market for executive talent. The link between executive pay and returns on capital reflects the balance of power between executives and shareholders. The market power of a chief executive can be seen most clearly in severance payment. At the point of severance the company is not paying to recruit or retain executive talent, but rather it is buying off market power. An outgoing chief executive still has huge power, which could be used to damage the company.
The point about Ronaldo being paid vastly more than Pele is relevant, but it is not the whole story. Footballer talent can be assessed quite quickly, but the assessment of what a business manager contributes is far more subjective. Footballers are more readily interchangeable than executives. The market for footballer talent is more transparent and has better separation between buyers and sellers than the market for executive talent. Severance payments are less significant.
The market for executive talent certainly has its sinister aspects, which should be scrutinised by regulators, especially those who enforce competition law.
Yours faithfully,
Revd Patrick Gerard
Note: My dialogue with the Office of Fair Trading on this subject can be seen by clicking on the link "Competition Law" in the left hand column.
Dear Sir,
Executive Pay – Let the fight begin (Economist 14th - 20th June 2008 – page 18)
Your leader on executive pay, surprised me with the comment, “Managers’ pay has grown faster that workers’ pay, but the reasons for this are not sinister. Whereas workers’ pay depends on the labour market …, managers’ bonuses are chiefly tied to returns on capital”
The thing which does appear “sinister” is that executive pay appears to have no relationship to supply and demand in the market for executive talent. The difficulty of recruiting and retaining executive talent in a highly competitive international market is often cited as a reason for increasing executive pay. However if prices in that market are not related to supply and demand then that market cannot be competitive in the sense that leads to economic efficiency.
If prices in the market for executive talent are not driven by supply and demand then we have to ask what does drive them. The most likely answer is the market power of directors of public companies, who are both the principle suppliers and principle purchasers in the market for executive talent. The link between executive pay and returns on capital reflects the balance of power between executives and shareholders. The market power of a chief executive can be seen most clearly in severance payment. At the point of severance the company is not paying to recruit or retain executive talent, but rather it is buying off market power. An outgoing chief executive still has huge power, which could be used to damage the company.
The point about Ronaldo being paid vastly more than Pele is relevant, but it is not the whole story. Footballer talent can be assessed quite quickly, but the assessment of what a business manager contributes is far more subjective. Footballers are more readily interchangeable than executives. The market for footballer talent is more transparent and has better separation between buyers and sellers than the market for executive talent. Severance payments are less significant.
The market for executive talent certainly has its sinister aspects, which should be scrutinised by regulators, especially those who enforce competition law.
Yours faithfully,
Revd Patrick Gerard
Note: My dialogue with the Office of Fair Trading on this subject can be seen by clicking on the link "Competition Law" in the left hand column.
Labels: demand, sinister, supply
