Old debate on executive pay raises its head

Is Stephen Elop, outgoing CEO of Nokia (and maybe the incoming CEO of Microsoft) worth €19 million? I have no idea. But I am willing to bet that the only people who answer 'yes' to that question are themselves at board level in major corporations (or have aspirations in that direction). Executive pay arouses much passion; which side of the debate you are on is mostly determined by where you sit: in the boardroom or not.

It’s an old debate with a couple of modern twists. It’s about how the economic spoils get divided. Emperors and monarchs have always had strong views on this, as do most of our gods. Marx gave us one way to think about the problem, Adam Smith another. Pink Floyd wrote a classic rock song about it.

The concept of “fairness” quickly enters any discussion about the distribution of income and wealth. That’s often where the debate goes pear-shaped.

The descendents of Marx think fairness means equality: the economic cake should be shared equally by all. Economic Darwinists insist that the size of the cake matters above all else and that redistribution will only shrink what is available and is therefore self-defeating. Most sensible people get a headache when confronted by all of this and suggest that some combination of market forces and modest redistribution usually seems to work tolerably well.

How well things are working has become a very topical question in the light of a stream of data about a very modern trend: the winner, it seems, really does take it all. From sports stars to CEOs, the rewards are increasingly fabulous. And the rest of the population - the 99 per cent - are stuck.

Growing income inequality in many countries is a much discussed and well documented trend. In the US (in particular) we have some new data that illustrates just how inequality seems to be accelerating. Most recently, in the last three years, the top 1 per cent captured 95 per cent of income gains.

Over a longer time frame, inequality grew between the late 1960s and the turn of the century because incomes of higher earners grew faster than the incomes of low earners - but both groups did see rises in real incomes. The relative position of the top 10 per cent really took off between 1990 and 2000. But real incomes for just about everybody (including the 0.01 per cent) were still below 2000 levels at the end of last year. Top incomes are growing again, unlike, for now at least, those of pretty much everybody else.

If the facts are well established, the reasons underlying all of this are a matter of much dispute. Globalisation, financialisation, technological change, the demise of trade unions: these are the usual suspects. It’s a complex story with many different drivers.

Why are Premiership soccer players paid so much more than before? The advent of satellite and other means of broadcasting - technological change - are obvious drivers. What about bankers? Financial salaries have always been high but their growth in recent decades is unprecedented. We know where all this ended up but it is far less clear why the financial sector grew so much for so long.

Boardroom pay is another mystery. It has always been the case that owners of successful companies have been well rewarded. What’s new is the way in which mere employees are paid as if they are owners, without much connection to success or failure. Any explanation that focuses on ‘market forces’ is easily dismissed. There is scant evidence that senior executives move around between different companies in a way that is consistent with the usual workings of supply and demand. The finger of suspicion is pointed firmly at ‘remuneration committees’. By definition, this is the action of a central planner rather than an impersonal market force. And a central planner that often has skin in the game: a member of a remuneration committee is often an executive of another company, where another remuneration committee sits, looking at the data that determines his pay. If the name of the game is to pay ‘market rates’ you want those rates to be as high as possible.

In the US and elsewhere there is some recognition that ever increasing inequality is unsustainable. The mammoth Dodd-Frank legislation that seeks to remedy much of the evident ills of financial and corporate life has something to say about all of this. Amongst other things, it seeks to compel companies to shed more light on the ratio of CEO pay to that of the ordinary employee. Even this small measure is under attack from senior Republicans. But when the basis of the American dream - the ability to get ahead - is under such evident threat, expect much more on all of this.