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.