The divine right of fat-cat executives

Yesterday, Brendan Barber, the TUC leader, criticised the high pay levels of senior executives and questioned whether their remuneration was justified by their performance. The response from the CBI was predictable:

Complaining about executive pay might give the TUC brownie points with union members, but it ignores the reality of a global economy where there is a fierce battle for senior-level talent. Having the right executive team can make the difference between a company’s success or failure, with repercussions for the whole of society, not just those at the top.

Now anyone who has worked in a British company will know that this is complete bullshit.  Most senior executives make it to the top of their organisations by a mixture of steady competence, political game-playing, back-stabbing, kowtowing, a lot of good luck and, perhaps, the occasional flash of brilliance.  A few are not even steadily competent but they make up for it by being better at all the other stuff. Large companies are bureaucracies. The qualities that lead to advancement in private sector organisations are, for the most part, no different from those required to achieve promotion in the public sector or in the old Soviet Union. 

The suggestion that our business leaders are creative, entrepreneurial risk-takers is not borne out by any evidence.  There is little, if any, relationship between executive pay and company performance.  Senior executives pay themsleves large amounts of money for mediocre, or even disaterously poor, performance. 

A report by the Work Foundation, published last week, concludes that company Chief Executives bear less risk than the average employee. At 14 per cent, the turnover rate among CEOs is less than the private sector average of 22 per cent, indicating that their employment is relatively secure. In the rare event of a CEO being fired there is usually a large pay-off to soften the blow.

The way in which employees who under-perform, or who fall out with their bosses, are dealt with by companies is a good indicator of their social status.  Once managers reach a certain level in the organisation they are rarely, if ever, subjected to the company’s official disciplinary procedure. If they are asked to leave there is usually a large payoff, much larger than the organisation’s standard severence package, and a period of “gardening leave” where they recieve their full salaries without having to turn up at work. All of this is much more than the organisation is legally obliged to pay. Even senior managers who have worked for companies for less than a year, in which case thay have no legal protection at all, often walk out of their jobs with hefty severence packages.

There is no economic rationale behind these payments but there is a sound social one.  When a senior executive is eased out of a company, all his peers think “there but for the grace of God”.  If the directors set a standard by which failure is cushioned with a large pay-off, it acts as an insurance policy should their own cover ever be blown.  The remuneration levels and severence payments awarded by senior managers to other senior managers are a fine example of class soldarity. The TUC can only dream of such fraternal comradeship.

Back in 1962, Barbara Wootton wrote a book with the catchy title, “The Social Foundation of Wage Policy”, in which she argued that pay was determined as much by social factors as by market forces – so that, for example, even when there is a surplus of doctors, their pay levels will not fall according to market forces because other doctors make sure that they continue to be paid at an appropriate level. The behaviour of our senior executives shows that her findings still have some relevance in 2006.  Indeed, the Work Foundation’s report argues that the excessive pay levels of senior executives amount to a “perversion of market principles”. High pay and rewards for failure have more to do with senior executives looking after each other than with performance in the market-place.  

Even more ridiculous is the suggestion that British senior managers might take advantage of the global war for talent and take their skills abroad.  OK, a few clever high-flyers may have transferrable skills but most do not.  Like most of the UK population, British executives have few foreign language skills so their scope for finding work overseas would be limited to other Anglophone countries and perhaps Belgium and the Netherlands. Are these counries so short of senior executives that they would need to import some of ours? I doubt it. In any case, most of these top managers are corporate salarymen who would be nothing without the power-bases they have built up in their own organisations over the years. 

Despite what the CBI says, if British senior execuitives were more heavily taxed, they would not all jet off to luctrative jobs abroad and, even if they did, their places would be filled by equally competent people rising up through the corporate ranks. It takes more than a few highly paid corporate placemen to build a successful economy - and to ruin one. 

Like all power elites, corporate senior executives need a self-justifying myth. Four hundred years ago Kings, and their sycophantic supporters, told our ancestors that royal authority came from God. Treason, they said, would not only be punished by death but also by damnation. Today’s corporate elites, and their cheerleaders, tell us that their pay is justified by market forces and that any attempt to tax or restrict it will lead to economic ruin for all of us. Neither of these stories has any solid evidence behind it. The assertion that the the pay of senior executives reflects the benefits that they bring to the British economy is as much a fairy story as the Divine Right of Kings. 

  1. KathyF said:

    I had to check the spelling to make certain this was not written by an American.

    I know a lot of people who are/are married to Americans who are employed in high levels of multi-national corporations here, and I suspect rising exec pay here is a direct result of American companies paying their execs so highly.

    I’m afraid you’ve got a long way to go before you catch up with American exec pay, more’s the pity. I just read about one CEO who received a $40 million+ bonus. Makes £5 million look like janitor wages.

  2. Jonn said:

    Good points, all… but does anyone believe otherwise any more? Even the Economist, bastion of old fashioned capitalism that it is, goes on about how overpaid executives are.

    The CBI are simply doing their job and reflecting their members’ interests. All such groups do it: last summer, the BMA put out an ill-judged press release about how the 2% annual pay rise for consultants was “insulting.” Sympathy was limited because someone pointed out that these guys were already earning six figure sums.

  3. Jonn said:

    And also, does anyone know how to stop it? Higher taxes on superhigh earners isn’t a bad idea economically; but it

    a) may just lead to even higher executive pay, as salaries rise to provide the same take home income; and

    b) would be political suicide.

  4. James G said:

    Hi Steve,
    You make some really good points there, and I agree with most of it.

    A lot of my trepidation with regard to this debate, however, is that the word “company director” gets thrown in with the word “fat cat” as there are loads of risk-taking company directors out there who take home nowhere near that amount of money who are most likely to be targetted with any legislation that comes about. Unlike the “fat cats”, they don’t have legions of lawyers and tax advisers to shield them from the sort of legislation that would come about from this sort of debate.

    To tell you the truth, though, if under a particular person’s helm, that person generated wealth for other people, such as the shareholders and the pension funds, and, yes, ensuring employment for the lower echelons, I have no problem with hefty performance-related bonuses.

    If, say, an investment banker brokered a 6 billion dollar deal, what is wrong with him taking home a percentage of the profit from the deal? (Leaving aside ethical issues on what the deal is or how it is to be executed).

    Also too, as it is the shareholders that own the companies, it is ultimately up to them to ensure that the governance structures are in place to avoid abuse.

    As a shareholder, I would rather that money be put back into the company or parceled out as a dividend for me, but any money taken from the top executive’s pay packet is not going to end up in worker’s wages.

  5. Katherine said:

    James G – your comment about shareholders controlling abuse is theoretically true, but practically non-existent.

    I’m talking from recollection of anecdote more than anything else, but as far as I am aware most shares are not held and controlled by individuals who read the documents and attend the shareholder meetings – they are institutions, pension funds and that sort of thing.

    And guess who heads up the institutions and funds? Yes, you guessed it, highly paid executives, who have a vested interest in not seeing the wages of their peers closely examined in case the spotlight falls on themselves also.

    Individual shareholder control in large corporations could be compared to representative democracy at best.

  6. Steve said:

    Jonn – what makes you think taxes on high earners would be political suicide?

  7. Steve said:

    James – yeah maybe the ‘fat-cat’ term was a cheap shot. I’m a company director, at least on paper, and I’m not at all fat. I’m not a cat either – at least I wasn’t last time I looked.

    I take your point though. Some directors do take risks and have great ideas and deserve their rewards but most senior people in the large corporations are bureaucrats like everyone else.

  8. Jonn said:

    Steve – because our political parties are in a funding crisis, and – despicable as it is – largely dependent upon contributions from friendly businessmen. A new top rate of tax would, I imagine, cause that funding stream to dry up pretty quickly.

    And while the public shows no interest in public funding of political parties, that would probably leave the party proposing the idea unable to fund an election campaign.

  9. Jonn said:

    I should clarify – I don’t like this situation. I think there is a strong moral case for higher tax on outlandishly high earners (I’ve never seen much evidence that trickledown economics works), and I think it’s a concern that the rich should have so much influence over our politics.

    But… they do. And while that’s true I don’t think you’ll get any mainstream party proposing a policy that would really hit their wallets.

  10. frog said:

    James G.
    most of the Mergers and Acquisitions frenzy is just that.

    An excess of liquidity, and cunning schemes to make it all pay for itself, (rather like some neo-cons believed the Iraq Invasion would be self-financing– excuse bad joke, but TRUE ), have resulted in a frenzy.

    The merchant bankers laugh their socks off.

    Sorry I have no supporting links, but studies have been done on these Mega-mergers, which showed that very often there was no ‘synergy’, rather the opposite.

    Of course the price of the stock rose when they announced 10,000 lay-offs.

    That’s REALLY goodnews.

    Of course there was immediate added value to the Pension Funds and private stockholders, but a coupla pretty large company towns in the US just died, my friend.

    So ‘paper wealth’ as shown in Wallstreet was generated, for a while, but what next ?

    When I began as a neophyte money-broker in ’77, my boss gave me a brilliant two-hour lecture on ‘arbitrage’.

    The Big Banks got the big Saudi eurodollars . No way were they going to lend to Brazil or Rumanian ForeignTrade bank. So they farmed it out, through us, to smaller banks, who did. And regretted it .

    Well, it gave me a comfortable lifestyle, becos in my very small way I was close to the Big Money. It rubbed off on me, so we could have an au pair and a cleaning woman, so there was a little ‘trickle down’. Just luck.

    Maybe you, or someone else, will remember the IBM salesman who got the US Army contract ? They were paid by the unit, selling one or two here and there, and this guy got the mega-contract . Like to know what happened to him.

    So my nephew’s boss at Goldman got a $52mio Christmas bonus.

    What human being has a personal use for that amount ? Hell, it’s almost as much as the US paid for the Orange Revolution. And that did not work exactly as planned ….

    Excellent article by Steve.

    The Power of Myths, and their endless repetition by the MainStreamMedia , is truly wondrous to behold.

  11. Steve said:

    Thanks, Frog, I have some figures somehwere on how most mergers fail. I’ll try to dig them out.

    I fear than Jonn may be right, though. The political parties dire financial state makes them very dependent on rich donors – so the fat-cats will continue to get fatter.

  12. Jonn said:

    What really scares me about this situation is that, if you’re a progressive at all, the obvious path to go down becomes the Blair one: suck up to the obscenely rich, appeal to their better natures, try and get their backing for projects to make the world better.

    It’s… an _immensely_ unattractive proposition. But once you stop thinking you can take them down, it seems to be the best option. And I don’t like it at least partly because it makes a huge chunk of Blairism suddenly make sense.

    And, you know, just because someone’s rich it doens’t mean they have no conscience. Look at Bill Gates. Or Warren Buffet.