Sunday, 3 June 2018

Keep your nose out of executive pay!

This is from the concluding paragraph of a recent academic paper on executive pay:
While the pay controversies fueling calls for regulation have touched on legitimate issues concerning executive compensation, the most vocal critics of CEO pay (such as members of labor unions, disgruntled workers and politicians) have been uninvited guests to the table who have had no real stake in the companies being managed and no real interest in creating wealth for company shareholders. Indeed, a substantial force motivating such uninvited critics is one of the least attractive aspects of human beings: jealousy and envy. 
I would recommend giving the paper a read as it has some interesting things to say about various attempts at executive pay reform. Two things in particular I did appreciate are the acknowledgement of the potential for *positive* unintended consequences from policy interventions, and of the fact that companies do try and find gaps in / ways around regulation.

But the above paragraph is indicative of why I have a lot of problems with some of the dominant ideas in corporate governance, and in the sub sector of executive pay.

Given that we know that in Actually Existing Capitalism when we say "shareholders" we really mean asset managers. (As a side note in this paper it is notable that union pension funds are highlighted as a group of activists, with the implication (as I read it) that they aren't really the right kind of shareholders.) As such I really struggle with the suggestion that union members and workers (they have to be prefaced with the pejorative 'disgruntled', obviously) are "uninvited guests" in discussions about the distribution of rewards within companies. And I think upside-down to suggest that the workers in a company have no real stake in the business compared to shareholders.

This conclusion also takes as read that creating wealth for shareholders is the function of business (rather than, say, one of its outcomes) which is highly contestable. More interestingly, again we see a mainstream corporate governance paper suggesting that different stakeholder interests - those of union members and other workers, and those of shareholders - are potentially in conflict. The implication in this paper is that in such a scenario the interests of shareholders are justified and therefore should win out. I would say these are far from settled issues now.

What about the claim that critics are substantially driven by "jealousy and envy"? I would suggest that it's more about conceptions of fairness, which seems to be form of judgement that humans have evolved. I think that people are more concerned that rewards are determined fairly, than that they necessarily benefit personally. The sense you get from ordinary punters is less "I want some of that" than "how the hell do they get away with this?". But if jealousy/envy is apparently so important, shouldn't we expect to see this in the demands made by executives in respect of their remuneration, and perhaps we should start there?

Finally, in my opinion the tone of the paper, exemplified by the conclusion, is part of the problem that the 1990s corporate governance model has. In this world, executive pay is not a political issue, it is a technocratic one that, if it cannot be 'solved', can at least be defused. There is an array of views that are packaged into this perspective, such as that pay is a private matter between companies and shareholders; the public is misinformed/misled; politicians are meddlers who usually make mistakes; and concern about pay levels (rather than structure) is misplaced. As such it is quite a natural for people who hold these views to suggest that only a select group of people are legitimately allowed to comment about executive pay. Personally I am surprised otherwise smart people cannot grasp how utterly elitist all this sounds.

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