Nick Clegg is apparently going to “get tough” on executive pay.
We’ll come back to how in a moment, but let’s look at why; and why not.
First of all the disparity in incomes is going up sharply (with thanks to regular reader Ray Fletcher for this link.)
As I’ve mentioned there is inevitably going to be a wage and wealth disparity in any capitalist society (and societies not based on capital work on status, which gets distributed in a similar way – see Fiske A.P, Structures of Social life, the four elementary forms of human relations).
But how far do you think that disparity can go before you get a breakdown in society?
So that’s a reason “something ought to be done”.
How about the “reward for being useless” argument?
That’s valid too, isn’t it? After all, the bank executives were paying themselves bonuses, are still doing it, even when they are not making profits. And it’s the same with any organisation, people generally don’t mind what executives are paid if they are doing a good job.
But that runs into a couple of problems – one of physical laws and one of people.
The physical law is, quite simply, uncertainty. We don’t really know who is doing well and who isn’t. Say you take over a big company that’s doing well. Let’s say you grow business by 5% in real terms. Is that good? Well, it depends on what timescale it’s over, what you inherited, what competitors do, what the market as a whole does, etc. Whatever you claim, from having been a completed duffer to a genius, you can find “evidence” that it’s true.
That’s why evaluating economic performance of organisations, economies, trading blocks etc. is so difficult that nobody can do it until afterwards (and even then, they are guessing, according to the laws of physics). That’s why Robert Peston can tell us in a TV series where it all went wrong, but he wasn’t there in 2007 telling everybody how to avoid the upcoming crash that he is now explaining in such expert detail in retrospect.
The human problem is our tendency to see all problems as black and white, not infinite shades of grey. However complex the concept and however hard to define, we simplify it to a headline and bandy words interpretable in widely divergent ways as if they had simple, universal, unitary meanings.
With pay we work on the Victorian basis of the “deserving” and “undeserving” (except we’re talking about the rich, they were talking about the poor).
And generally, our black and white definitions are dictated by our political leanings and personal position.
So if we’re a right wing, “Captain of Industry”, we feel that executive pay is a reward for effort. The only reason people would argue about successful people being paid a lot of money is jealousy. After all, the argument goes, would you say that Lord Sugar doesn’t earn whatever he wants to pay himself in terms of creation of jobs and wealth – and if you do, I hope you’re prepared to be the one to tell him that you think he’s a parasite.
On the other hand, if we’re a left wing, “professional person with ethics”, we feel that this is about hypocrisy, cronyism and self aggrandisement. How can it be justifiable that a failed banker is paid 100 times what a nurse is paid or that a successful surgeon who saves lives every day that nobody else could save is paid less than a tenth of a bank CEO who is no different, ethically or professionally with a dozen other bank CEOs? And if you really feel that Sir Fred Goodwin earned £700,000 a year pension then perhaps you’d explain how to all the public sector strikers over pension rights, since RBS is now effectively in the public sector.
It’s hard to measure success, but that is back to how again.
It’s actually even harder to get people to think beyond their black and white frames of reference.
The fact is that some executives do earn massive rewards, because they do things (in terms of providing jobs and wealth) that other’s cannot do. And some are massively overrated and have never earned a tenth of what they’ve been paid, they’ve just been lucky enough to be in the right place (a merchant bank not a nursing ward, for example) at the right time (1997 -2007 for example, not 2007 -2011). And the vast majority are somewhere in between, they sometimes earn a bit more than they are paid, sometimes less, some never earn as much as they are paid, some constantly are under-rewarded.
But that is too complicated a concept for most of us, most of the time. We rely on statistics.
Statistics are great, but they are a way to collect lots of complex, multi-faceted data into simple, two or three dimensional summaries. So the average family has 1.8 children. So we’ll make policy to fit the average family. The fact that this means that the policy fits no family at all is, if it is thought about at all, seen as a small price to pay for simplifying the problem.
In the same way, the “problem” of executive pay is seen as one of “what is a fair pay” for all of them, as if they are one, homogeneous group rather than an heterogeneous group of individuals in individual situations.
And the other why question is “why would any politician bother”. As with regulating finances small group theory and the fact that the wealthy are a) likely to have greater power to keep the status quo and b) the people that politicians want to mix with for the day when they are ex-politicians (would you pay £20,000 a day for “consultancy” from Tony Blair based on his business acumen and not his contacts) means that I’m not sure anybody in a position to change things is really going to be motivated to do so – whatever the rhetoric.
As to how – I’m not going to pretend that I know the “answer”. In fact, I don’t think there is a simple and singular answer.
But there might be a set of answers that we could tease out by discussion.
And a couple of points that could inform that discussion.
There’s very little point in trying to set up rules (like tax rules) to prevent “abuses”. As with the banks, that runs into the poacher and gamekeeper conundrum and experience shows it doesn’t work. Apart from anything else, you simply start an “arms race” to see who can subvert the rules most effectively.
What we could look at is changing the definition of what “success” means. As with banks if the rules are changed as to what gets rewarded (it isn’t just profit, it is social value, customer satisfaction etc.) on those organisations where the public have some control then things start to change.
And with competition, the organisations that are private and whose executives set their own pay (with the help of their own “small group”, the executives running the funds that own most of the shares) will potentially be forced to follow suit or become uncompetitive and potentially very obviously undeserving of huge rewards.
But overall, we must recognise that we need solutions that don’t assume a simple, “they are parasites” or “they are engines of progress” view. That recognise that people and situations are unique, not uniform. That take account of the reality of measuring “success” in terms of the future, not simply the past. And that recognise the motivations and human characteristics of the executives, the regulators and the people.
After all, we’re dealing with people. And if some of them behave like angels or devils some of the time, it doesn’t stop them actually being people all of the time.
More from Mindful Money:
Incentives to rescue the UK economy
Does political climate effect your investment strategy?
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