Top Dogs and Fat Cats
8 May 2019
SUGGESTED
Housing and Planning
An economic analysis of the Treasury’s treatment of privately rented housing
4 May 2019
Healthcare
Economic Theory
https://iea.org.uk/wp-content/uploads/2019/04/Top-Dogs-and-Fat-Cats.pdf
Summary
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- In contrast to the recent past when even Labour politicians were ‘intensely relaxed’ about high pay, there is now widespread concern about the apparent excesses of some pay structures in corporate businesses.
- Top pay has risen much faster than average levels of pay in the last twenty years. This is in part the consequence of globalisation and developments in communications technology, but it may also be a result of rigged markets and ‘crony capitalism’.
- It is asserted that shareholders do not have enough influence on setting executive pay, which is determined by remuneration committees and consultants with a vested interest in boosting top pay.
- The public seems to distinguish between remuneration for CEOs – who are essentially employees of large businesses – and that of entrepreneurs, entertainers and sports stars, whose earnings and wealth can more easily be understood as related to their abilities and efforts.
- It is important to understand how pay data are produced and used. It is also important when assessing sensitivity to performance to look at changes in wealth (as a result of changes in share prices) rather than simply at the current pay package.
- In looking at trends over time we need to distinguish between pay awarded and pay realised. It may be that political pressures have recently reduced the reward for future performance, but this will not be reflected for a while in currently realised pay, the basis for which will have been set some time previously.
- A claim is often made that CEO pay bears no relationship to company performance. To assess this claim requires rather more sophisticated analysis than is often employed by activists and the media. Using such analysis it does seem that pay reacts (both positively and negatively) to changes in performance, though possibly less than it should.
- The widespread adoption of Long-Term Incentive Plans (LTIPs) has been widely criticised; it is felt that these schemes are often badly designed and have led to unnecessary inflation of executive pay.
- Politicians and electors are also concerned about high pay in the public sector, and in sectors where government funding plays a major role, such as universities, academy schools and many charities. This has led to informal pay caps being administered by regulators.
- There is a ‘gender dimension’ to high pay: women are underrepresented among very high earners. This does not appear, however, to be the consequence of discrimination, but rather the result of choices and lifestyles which differ between men and women. This may be in part the consequence of inadequate information and networks.
- Governments need to be careful in how they react to populist calls for action. The current requirement for large businesses to spell out the basis of their pay structure may be acceptable, and maintaining a watchful eye on pay in the public sector is sensible. But giving the state power permanently to fix pay ratios or even pay caps brings dangers which are not sufficiently discussed by those demanding government intervention.
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