he threat of a strike, a committee of the good and the great would be convened to decide what people engaged in a particular trade or profession should be paid. Invariably, they recommended a substantial increase.
Nowadays that is pretty much how pay for executives in the private sector is decided. A committee considers ponders the questions and comes up with the recommendation that they should be paid much more.This impression was strengthened by the threat of the directors of the Royal Bank of Scotland to resign if they were not allowed to pay bonuses of £1.5bn to staff on its investment side. Granted the directors were not the potential recipients of those bonuses, but this was still militancy to maintain the status quo.
Stumbling and Mumbling expanded on this view of executive pay, and of executive bonuses in particular, in a recent post:
Although CEOs [chief executive officers] might not be able to reliably affect corporate value on the upside, they can assuredly affect it on the downside through deliberate vandalism and theft. In this sense, bosses are paid a fortune not so much to motivate them to great performance, but to buy off terrible performance. It’s just an extreme manifestation of the efficiency wage argument.
And this might partly lie behind Hester’s bonus. Robert Peston says the Treasury feared that Hester and the board would have resigned if it had vetoed a bonus. Now, whether this threat was serious or not, and whether the resignations would have been anything worse than a short-term inconvenience, are separate questions. The point is that this shows that bonuses are a reward for power, not performance.This does much to explain why quite mundane executives now expect substantial bonuses over and above their salaries. And bonuses have appeared in the public sector because of the Thatcherite and Blairite distrust of the public-service ethos. Unless you motivate managers with the prospect of bonuses, they will not perform.
To believe that the existence of all these bonuses is a result of the free market, you have to believe that all these run-of-the-mill executives are always on the point of departing for highly paid positions abroad. It is only the existence of bonuses, you will have to argue, that keeps them in the country.
Such an argument would clearly be nonsense, and we need a proper free market in executive pay to sweep this corrupt system away.
Launched yesterday, Liberal Reform dedicates itself to:
promoting an all-round Liberal ideology in Lib Dem policy, including the economic liberalism that the founding members feel is lacking a voice in the grassroots of party.But will its interpretation of economic liberalism see it calling for a reform of bonuses or emerging as another champion of the status quo?
I think there are other issues at play. The single biggest factor is globalisation - look at the FTSE100 today and you see many more international companies, therefore there is more of a global search/competition for talent than 30 years ago. In addition, companies are much bigger, the requirements on the CEO more stringent.
ReplyDeletePay transparency has also exerted a ratchet effect, as it enables direct comparison and most folk want to know they're being paid at least as much as their closest rival.
And on bonuses, these have become increasingly common in order to keep salary costs lower. The increasing negative focus on bonuses is likely to see salaries increase, adding to firms' fixed costs which will then be passed on to consumers.