Friday, 8 November 2013

Executive Salaries

There's a head of steam building up about executive salaries. Not only has Oxfam decided to weigh in on the side of the Living Wage, but, as Matthew Lynn reports in Moneyweek, the Swiss have decided to tackle the subject head on.

A referendum this year forced companies to get shareholders' agreement on top salaries and another later this month will, if successful, force them to limit the highest salary a quoted company pays to twelve times the lowest. (Although currently that ratio is ninety-three to one in Switzerland, it's over two thousand to one in the UK.) It's hardly surprising that our governments only allow us a referendum once every forty years or so, if that is the sort of laws they produce.

Of course, all the over-renumerated executives are prophesying an exodus of big companies if the Swiss vote in favour of the twelve to one ratio, but if that's the way the vote goes, then their bluff may well be called. After all, Switzerland is one of the richest countries in the world and the most lightly taxed: it's hard to make a case for moving elsewhere if this is going to land the company with not only higher salary costs, but a much greater tax bill as well.

Also, it is very hard for the same overpaid executives to argue against the first referendum result. This can't be simply passed off as a result of the politics of envy. The shareholders are the owners of the company and if they are happy to vote the top management massive salaries, who's to complain. They, the shareholders are, after all, paying for it. If they are not happy, then why should they not be able to do something about it, directly. It would end the scam where a small group of of the same people sit on the boards of some companies and occupy senior management positions in others and routinely vote each other huge pay rises, at the expense of the shareholders.


Graeme said...

oh we get a whole series of CEOs paid the living wage and receiving huge bonuses...problem solved

Kj said...

Bayard: is the "shareholder gets to decide", and "maximum 12 times of lowest", two different proposals? The first one is simple enough, but the latter seems to be arbitrary and ignore the way CEO salaries are paid.
We had a far-left socialist party suggest a salary cap of 150K a couple of years ago. They were forced to admit that this would only be on salaries specifically, and could not be applied to capital income (as far as we´d still be a capitalist country). So as to make the cap pointless.

The Stigler said...

What business is it of government to decide what a private company should pay its staff? I don't agree with the whole executive pals thing and many execs aren't worth the money, but that's a private, internal matter.

Toby said...

Ah I was wondering if there was more to this story:

Mark Wadsworth said...

T, I would be very surprised if the headline corporation tax rate is that important.

What is important is that the UK makes it easy for large corporates to choose how much taxable profit to report, i.e. little or none. You can multiply "little or none" by any tax rate you like, the answer is always going to be a very low figure.

And mainly it is all the other things mentioned in the article which attract head offices to London. Fair enough, I moved here so why shouldn't they?

Anonymous said...

Couple of points. As already said, bonuses and share options would be the route around a salary cap.

Secondly, [not sure about Switzerland]here in the UK almost half of the shares are foreign owned [said owners don't give a crap about societal issues relating to really large income disparities]and the typical length of time a share is held is under a year. So short term performance [the next couple of quarters earnings]is all that matters whether the shareholders are foreign or not.

So my preference would be to place an absolute limit in terms of the multiple that is allowable by legislation after a referendum from all citizens.

Bayard said...

G, I expect the Swiss have thought of that, but perhaps they haven't.

Kj, yes, they are two separate referendums and I agree, the second one is a bit arbitrary.

TS, To a certain extent I agree, but private companies (or, in this case, public companies) are already asking the government for the shelter of the law in many ways, not the least of them being the concept of limited liability. However, I would agree that stipulating the maximum ration of salaries is a bit too far.

The Stigler said...


But "because limited liability" can then be used on anything, just because. I could say that employers should have minimum unionisation or women on the board "because limited liability", despite neither being related to the reasons why we have limited liability.

If you want responsibilities placed on companies because they get limited liability, it should be related to limited liability (and we might includes publishing accounts as such a thing, as it allows consumers to have information to help them decide who to trade with). Salary ratios have nothing to do with limited liability.

Furthermore, this will lead to an absurd arms race of individuals making a choice vs the state that will be as successful as the war on drugs. Companies will pay dividends, commission or bonuses to avoid the problem, more generous pensions, company cars etc.

At which point, you'll have politicians complaining about how companies are cheating, and start throwing a load of criteria in that include all those things. But of course, they'll then have to distinguish between real commission and fake commission, real company cars and fake company cars (with incentives for people driving lots of miles to get it classified). This will lead to more and more complicated lawsuits that fall down to the sort of biscuit vs cake case about jaffa cakes.

And if the government can even make this encylopedia or rules work, you'll then have companies firing cleaners and hiring them back in as outsourced suppliers, as they then don't count as salaried, or making directors contracted rather than employed, at which point you'll have lots of IR35-style battles over whether someone is employed or not.

And even if they can make it work, what's going to happen? Well, super talented people in companies will leave the country. The Premiership will become a dismal league as African footballers go to AC Milan or Bayern Munich instead of Chelsea, the sort of people who direct adverts will clear off to America and so forth.

What's the actual moral argument here, anyway?

Mark Wadsworth said...

TS, the 12-to1 rule doesn't mean that the tip top execs will have to take pay cuts.

They can just start paying their office cleaners £100,000 a year. Only they won't, they'll just sub-contract the office cleaning.

So they will have to sub-contract or outsource every job with the organisation which pays/is worth less than one-twelfth of however much they would like to take as salary.


Anonymous said...

@The Stigler "super talented people in companies will leave the country"

What you mean managers? Only few of which have started the companies. Moving from one company to the other like premiership football managers having some success here followed by some failure there even whilst creating an aura of superiority based on...well, often very little.

Does this mean that when the super talented icons go companies might have to promote complete imbeciles who formerly received orders from said icons? OMG.

Anonymous said...

Bayard is right to mention limited liability. What self respecting libertarian demands artificial life support as a pre condition for investing in a company anyway? This will only encourage scroungers and conmen intent on fleecing shareholders whilst enriching themselves before being spotted. Fred Goodwin springs to mind.

The Stigler said...


Well, yes. At which point, what have you solved?

I can't help but link it to the war on booze drugs/prostitution. It's someone wants to use their money to buy the services/goods of someone else, and intervening in trying to stop them doesn't work.

And I know people will talk about how someone isn't worth it, but we just don't know what's in people's heads. I don't want to be whipped by a dominatrix, but some people pay for it, so *shrug* let them get on with it.

Mark Wadsworth said...

TS, what have I solved?

I have worked out a way for said head honchos to help themselves from the till without having to pay their minions any better.

That is my job, thinking up loopholes and being paid for it/

The Stigler said...


Well, sometimes executives, sometimes not.

I know sales executives who are making good 6 figures. I know a software project manager who makes a quarter of a million. The sort of people who manage skyscraper builds are earning a huge amount of money. Chief designers at F1 teams.

I don't know if football managers and players are worth the millions they get and honestly I don't care. I can take or leave going to football as much as I can take or leave Pixar movies or Big Macs. If Pixar stop making good movies or McDonalds stop making Big Macs as delicious as they are, I'll stop shopping there.

As for limited liability, see my answer above. It is simply "this is the risk you take, take it or leave it".

Bayard said...

TS, if you read my reply, you will see I quoted limited liability as a justification for some laws on company behaviour, like anti-trust legislation in the US, and referring to the referendum that has now been passed in Switzerland giving shareholders more power. I agreed with you that mandatory salary ratios was a step too far. As Mark has pointed out, it won't work anyway. The shareholders are the ones being ripped off here and if they don't care about that, then that's an end to it.

"Well, super talented people in companies will leave the country."

Well, probably not. The point is, these over-renumerated execs aren't in the main, super-talented, especially in the public sector. They are just super-well-connected. A lot of the stink about rising executive salaries has been because they have been on the back of falling profits. Yer entrepreneur typically makes his millions by building a company up and selling it, not by drawing a huge salary. Most of the people the ratio law is aimed at walk into well-paid jobs in companies that pretty much run themselves. OK, some turn around failing companies, but a lot do the precise opposite, yet they still leave with a huge payoff, Fred Goodwin being a case in point (and then they usually walk into a similar job or a nice public sector semi-sinecure, like being the head of a Commission).
Come to think of it, there should be a law governing the maximum executives can earn, but it should only apply to the public sector. There's a herd of fat cats who could do with a little weight loss and there's an area where such a law is fully justified.

The Stigler said...


I completely agree about public sector. The chief execs of local authorities have a monopoly and very few would leave if you capped their pay at £100K.

And I'm not too worried about the "club of pals" that might leave the country, some of whom seem to walk from screwing up one company and going straight into another.

But there are CEOs that turn companies around, and are worth the £1m salary they're getting because they made sure the company delivers a profit rather than a loss.

But what I'm most worried about is top technical people - chief designers at F1 teams, lead perfumers in perfume companies, lead fashion designers in fashion houses.

What always troubles me with these discussions is that many of the people who object to high salaries really don't know anything about business. When I worked at WH Smith, I heard a lot of resentment towards the CEO and what salary she was on, but the fact is that she was the CEO that turned WH Smith from a loss making company into a profit making company.

Bayard said...

TS, funnily enough, it was her I was thinking of when I said "OK, some turn around failing companies..."

Anonymous said...

OK, well your point about the boss at WH Smith indicates where the problem lies. Workers have an idea whether their high-paid bosses are clueless arseholes or genuinely good managers. They also have an incentive to distinguish between the two. Rational workers would want to retain a talented manager, as he is best able to secure their jobs and improve their wages. And they have every need to get rid of the bad boss, as it’s their jobs that are threatened by his greedy incompetence. Bottom line is CEOs have too much power. Workers too little. Shareholders don't gibe a monkeys so long as they can get in and out for a quick profit. Under a year will usually do. Let the workers decide. Economic democracy.

Mark Wadsworth said...

PC, you are now talking about something completely different, the fact that a company's share price has little or nothing to do with the business' reason for existence (which is to provide goods and services, pay wages, make profits etc).

That is easily fixed, you just need to tweak the "ownership" rules so that there is no share price any more, owners (be they "investors" or "employees" makes no difference) just own a share of the actual assets and profits directly.

It's not particularly radical, it just needs to be done.

Anonymous said...

Fair enough. The point about salaries for CEO's and senior execs is often answered by; 'let the shareholders decide'. They will often know far less than those who work in the company about the merits or otherwise of the management and are not overly concerned with remuneration until the quarterly earnings figures head south and then they most likely do a quick exit.
Workers and 'long term investors' have the company interests at heart and are best placed to make informed decisions. If they do I imagine we'd have income differentials more in line with Sweden, that renowned Marxist Leninist dystopia.

Bayard said...

"They will often know far less than those who work in the company about the merits or otherwise of the management and are not overly concerned with remuneration.."

Sad but true, because far too many shareholders buy shares for a possible capital increase, i.e. no different from gambling on the horses. So it's a bit chicken and egg: dividends are low, because all the profits that might have been consumed in dividends end up as executive renumeration, so shareholders don't care about dividends, the senior execs know this and so the know they can afford to grab that money for themselves and so on and so on.
However, the point is, not to lower exec salaries by law, that's just the politics of envy, the point is to let the people who end up paying for these over-renumerated duffers decide what to pay them. If they don't care, why should we?