Executive Pay – And Then What Will Happen?

The news is full of the differential between CEOs’ remuneration and average salaries. Apparently, the best paid bosses of the biggest companies earn in the region of 180 times the average salaries of workers in these companies. It is a big difference. Perhaps Charles Murray would regard it as unseemly.

However, wages, salaries and, for that matter, all prices are simply a signal of what the market will bear. Shareholders cheerfully award what you might think are excessively generous packages to executives who, in their opinion, massively increase the value of their holdings. And who is to say that they are wrong to do so? Not you! In fact there is no defensible principle on which you can say that they are wrong. None!

Presumably, these shareholders (like all purchasers) would like to pay less than the £4.9M which the top bosses get. But they reckon that without these fabulous salaries they would not get the top bosses. They reckon that for a lower salary they would only get executives of the second, third, or fourth rank – someone who could increase the bottom line by only millions, rather than billions.

They are acting in what they perceive to be their own best interests. We all expect to be allowed to do that. They actually believe that by paying less they would be worse off. Who can say they should be forced to do so?

Suppose you took it into your head to build a house. One consideration would be the market value of the completed edifice. Your resources make it possible for you to choose between hundreds of architects. A quotes you a fee of £X pounds. His reputation and track record suggest that the value of your house would be very substantial. His nearest competitor (B) quotes you a lesser figure of £Y but his reputation and track record suggest that the value of your house would be much less substantial. By what principle should you be compelled to prefer B over A? The question answers itself.

What will guide you is not a moral principle but your subjective (perhaps educated) estimated reading of the market. Every price is based on subjective estimates. Sometimes we agree to a price and subsequently regret having done so. Sometimes we rejoice in the purchase and even make a killing. The future is notoriously hard to predict.

To drag in the wages of bricklayers, carpenters and labourers is clearly an irrelevance when considering the architects fee. They have nothing to do with it. What you agree with the architect is not a moral question, provided that you do not rob or defraud third parties to acquire the means to pay him.

This brings us to a fundamental question: is Economics about morality? No. Economics is about consequences. The question can be framed thus: And then what will happen?

Sickeningly, governments are all too eager to get involved with citizens’ economic decisions. Governmental interference distorts markets. Tax something and you will get less of it; subsidise something and you will get more of it. That is the sort of lesson that Economics teaches. Incidentally, taxing and subsidising both involve government interference, sometimes simultaneously – tax work and people will work less (axiomatic); subsidise bastardy and you will get more of it (axiomatic).

Why are the BBC and Co making such a song and dance about Executive pay? Because they find the differentials distasteful. In their pusillanimous view, something should be done. We have shown (definitively) that their distaste is an irrelevance. Shareholders must be allowed to agree whatever packages seem best to them. They must be allowed to act in what they perceive to be their own interests. The salary of a secretary or the wage of a cleaner is not the benchmark for the remuneration of a CEO. On the contrary, a hugely successful CEO, who grows the company, may well thereby increase the provision of jobs for secretaries and cleaners.

Lest you should think that I am not interested in moral questions, let me remind you that the 10 commandments are very clear about covetousness: do not do it!

In the 60s or 70s there was a character known as ‘super hod’. He was a hod carrier who went to work in a Rolls Royce. Though unskilled, but very energetic, he could supply a more than usually large number of bricklayers with the bricks and mortar they needed to do their job. Imagine the outcry if his employers had been forced to pay him no more than ordinary hod carriers.