George Monbiot has written an article for the Guardian on maximum pay:
Let’s see what he has to say:
“The successful bank robber no longer covers his face and leaps over the counter with a sawn-off shotgun. He arrives in a chauffeur-driven car, glides into the lift then saunters into an office at the top of the building. No one stops him. No one, even when the scale of the heist is revealed, issues a warrant for his arrest. The modern robber obtains prior approval from the institution he is fleecing.”
Perhaps Mr Monbiot needs to look at the definition of robbery. It requires coercion, violence or threat of violence. It is nonsense to talk of robbery where the robber obtains prior approval. Doing things with prior approval is what most people refer to as a voluntary agreement or a contract.
What Mr Monbiot appears to be saying is that a contract on terms that he doesn’t agree with (And which he is not a party to) is the equivalent of storming into a bank with a sawn off shotgun and demanding all the cash is put in the swag bag!
Which says more about the twisted world view of Mr Monbiot than it does about the reality of the situation.
“The income of corporate executives, which the business secretary Vince Cable has just failed to address(1), is a form of institutionalised theft, arranged by a kleptocratic class for the benefit of its members. The wealth which was once spread more evenly among the staff of a company, or distributed as lower prices or higher taxes, is now siphoned off by people who have neither earned nor generated it.”
A corporation is a vehicle by which the owners, the shareholders, share the risk of an uncertain business venture. The shareholders appoint the board of directors to run the business on their behalf. They have the power to remove any director, including the CEO by simply voting him/her out of office.
If the owners of the business are not happy with the performance of the CEO they can either remove them or sell their shares to somebody who is happy with the performance. There is no “theft” involved.
Once again George is like Humpty Dumpty: ‘When I use a word,’ Humpty Dumpty said, in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’ He misuses emotive language like “theft” to hide the shallowness of his arguments.
On what basis does he declare that they have neither earned, nor generated it. Was the role of Steve Jobs at Apple of no consequence to the success of the business. Where Warren Buffet or Bill Gates not at least partly responsible for the success of their organizations ? Does he think these people would have been less successful if they had been simply paid a salary, rather than retaining a slice of the business ?
How big a role a CEO plays in the success of a business is clearly a fair question to ask in each specific case, but it is a question for the shareholders, not a question for Mr Monbiot or the envious socialist class.
“Over the past ten years, chief executives’ pay has risen nine times faster than that of the median earner(2). Some bosses (British Gas, Xstrata and Barclays for example) are now being paid over 1000 times the national median wage(3). The share of national income captured by the top 0.1% rose from 1.3% in 1979 to 6.5% by 2007(4).”
I assume that Mr Monbiot has checked his facts, but so what. Some people have done well, good for them. The hidden implication that they have “Captured” a higher share of the national income, at the expense of everyone else is again nonsense. It is quite possible for everyone to be better off and the top 0.1% still have a larger proportion of this enlarged total.
“These rewards bear no relationship to risk. The bosses of big companies, though they call themselves risk-takers, are 13 times less likely to be sacked than the lowest paid workers(5). Even if they lose their jobs and never work again, they will have invested so much and secured such generous pensions and severance packages that they’ll live in luxury for the rest of their lives(6). The risks are carried by other people.”
I agree, the rewards are not related to risk. Why should they be? Is the pay of a celebrity linked to risk, that of a premier league footballer or a pop star? Is Mr Monbiot’s salary related to the level of risk in writing for the Guardian?
The risk is taken by the investors who are rewarded for the risk if the company increases in value. Wages are determined by supply and demand for skills in the market place.
“The problem of executive pay is characterised by Cable and many others as a gap between reward and performance.”
The reward and performance are a matter for the shareholders to decide. If a company grows by 20% the CEO can still be a poor performer, if for example the other companies in that industry grew by 40%.
If a company loses money the CEO can still be a star performer, if without his efforts it would have lost far more and gone out of business.
Who is placed to judge the performance of the CEO in the market conditions of the business, if not the shareholders?
“But it runs deeper than that, for three reasons. As the writer Dan Pink has shown, high pay actually reduces performance(7). Material rewards incentivise simple mechanistic jobs, such as working on an assembly line. But they lead to the poorer execution of tasks which require problem solving and cognitive skills. As studies for the US Federal Reserve and other such bolsheviks show(8), cash incentives narrow people’s focus and restrict the range of their thinking. By contrast, intrinsic motivators — such as a sense of autonomy, of enhancing your skills and pursuing a higher purpose — tend to improve performance.Even the 0.1% concede that money is not what drives them. Bernie Ecclestone says “I doubt if any successful business person works for money … money is a by-product of success. It’s not the main aim.”(9) Jeroen van der Veer, formerly the chief executive of Shell, recalls, “if I had been paid 50 per cent more, I would not have done it better. If I had been paid 50 per cent less, then I would not have done it worse”(10). High pay is both counter productive and unnecessary.”
A few research studies do not make a fact. However, even if we accept it as true that increasing pay does not improve performance. So What?
Salary rates are determined by supply and demand. If the price of diamonds doubles in the market we do not expect them to shine twice as brightly! If the price of oil in the market doubles we do not expect each litre to give us twice as much energy!
If people do exist who can do the jobs as well for a fraction of the cost then any rational group of shareholders will employ them and gain a competitive advantage in the market place. This will force other companies to do the same or be driven out of business. The market is self correcting.
“The second reason is that, as the psychologist Daniel Kahneman has shown, performance in the financial sector is random, and the belief of traders and fund managers that they are using skill to beat the market is a cognitive illusion(11). A link between pay and results is a reward for blind luck.”
I have a lot of sympathy with this view, I agree that the results in the financial sector are largely driven by luck. However, there is nothing stopping investors from putting their money in low cost tracking funds. If consumers believed that fund managers do not influence results and invested on price, the tracking fund with the lowest management fees would win all the business and the high pay would disappear.
Consumers often make mistakes by rational standards and reward things with their behaviour that are not objectively worth much. They buy worthless books on astrology, they pay inflated prices for tat signed by the latest celebrity, they buy bottled water.
However, preferences are subjective, not objective and people are free to spend their money on whatever pleases them. If they think fund managers are good value for money then they can pay extra for them. Even Mr Monbiot has not (Yet?) suggested that a government department should vet all consumer choices to ensure that they are approved!
Likewise if all shareholders want to pay a star fund manager and none want to take the risk that its not all down to luck, well that’s their choice.
“Most importantly, the wider consequences of grotesque inequality bear no relationship to entitlement. Obscene rewards for success are as socially corrosive as obscene rewards for failure. They reduce social mobility, enhance plutocratic power and allow the elite to inflict astonishing levels of damage on the environment(12). They create resentment and reduce the motivation of other workers, who see the greedy bosses as the personification of the company(13).”
Yes, people are envious of others.
It is not a trait to be encouraged.
Your financial welfare is determined by what you earn. It is not improved by reducing what somebody else earns.
The causal relationship between high executive pay and environmental vandalism is clear only to Mr Monbiot!
“Vince Cable has announced four main policies: more transparency, a requirement that companies should “report” on boardroom diversity, a mechanism for clawing back pay settlements not justified by the company’s performance, and granting shareholders binding powers to block excessive rewards. They are likely to be almost useless – or worse. Pay transparency, while of general interest, can create the perverse result that executives discover how much their rivals are getting, and use the information to demand more.”
Pay transparency to shareholders is a good thing. Self interested shareholders will already be demanding it.
The idea that open market pricing will push prices up, is only true if you believe that executives are underpaid and don’t know it!
Should we likewise stop ASDA from advertising the price of its oranges, in case this alerts Tesco to the fact theirs are too cheap and they put the price up. Utter nonsense!
“The clawback mechanism will be inserted into the corporate governance code(14). This is voluntary, and its existing provisions are widely ignored.”
The idea of a clawback makes no sense. It is like asking to clawback the money earned by Mr Monbiot if the Guardian circulation falls, after he stops writing for it!
Once the CEO is replaced the results from that point on are down to the new CEO. How can you logically punish the old CEO for the performance of his successor? Anything foreseeable at the point of departure is taken into account, anything unforeseeable is down to the successor.
“Shareholder power is likely to be illusory. As Prem Sikka has shown, the proportion of stock owned by individuals fell from 47% in 1969 to 10% in 2008, while the percentage in foreign hands has risen from 7% to 42%(15). Why should oil shiekhs care about social justice in the UK?”
Why should any shareholder, or indeed any rational person care about the socialist myth of social justice.
“And most traders hold shares too briefly to take an interest in the inner workings of a company. As Rob Taylor, formerly the chief executive of Kleinwort Benson, points out, if shareholders don’t like the way a company is run, they don’t hang around to change it; they sell up and move on(16).”
They can only sell to someone else who does like the way a company is run. If nobody thought the company was well run, then they would be unable to sell and would need to take action to change the management.
“Labour’s policies seem designed to sound tough but change little. Like Cable, its spokesman Chuka Umunna talks of transparency and simplicity (which are both worthy aims) but not of holding down pay. Labour has based its policy on the findings of the High Pay Commission, which have been widely hailed as revolutionary. I’ve read the commission’s final report, and can find no justification for this description(17). Its recommendations are, to be frank, pathetic.”
“With the possible exception of employee representation on pay committees, the twelve measures it proposes are likely to make only a marginal difference.”
The recommendation of employee representation on pay committees is the most stupid. The market decides what salary levels will be, if they are different to the valuation of the employee representative, so what?
The employee may think that diamonds are expensive relative to water. He can sell diamonds all day long at water prices, but will find no takers for his water at diamond prices.
“Nowhere does it suggest anything resembling the obvious means of capping executive pay: namely, er, capping executive pay.So what should be done? The UK government imposes a minimum wage, and even the neoliberal coalition appears to accept that this is a necessary intervention in the market.
Err, no a minimum wage is nonsense and simply drives up unemployment for those whose skills are not productive enough to jump over the minimum wage hurdle.
“So why should it not impose a maximum wage?
I’m not talking about ratios or relative earnings. Various bodies have proposed that there should be a fixed ratio of the top earnings within a company to either the median or lowest salaries. But as a report on this issue by the New Economics Foundation shows, the first measurement quickly becomes complex and opaque, the second creates an incentive to contract out the lowest paid work(18). I’m talking about an absolute maximum, applied nationwide.”
If only socialists would study economics they wouldn’t continually propose price caps and floors. The impact of a price cap is shortages, the impact of a price floor is over-supply.
This is not news, this is what thousands of years of economic history have shown.
“Let’s say £500,000 a year, a figure that includes bonuses, share options, pensions and benefits. It will rise with inflation, but no faster than that. If you want to make more, you can invest in a risky venture of your own or someone else’s. If you want to make more money as a salaried worker – in other words while other people carry the risks – you can go abroad, and good riddance to you. Another country, incautious enough to set no cap, can deal with the consequences of your destructive greed.”
So no Premier League footballers, no pop stars, no film stars? All the people in associated industries to be made unemployed presumably?
All the best business talent goes abroad leaving our industries unable to compete with their international competitors. Our businesses go bankrupt and people become unemployed.
What a stroke of genius, Monbiot’s class war, envy fuelled, hatred is satisfied, but everyone is worse off!