The following is from the New Economics Foundation report entitled A Bit Rich:
Myth: We need to pay high salaries to attract and retain talent in the UK
For this myth to be true a number of other myths must also be true: that the highly paid are first and foremost rational economic actors; that social mobility is a reality that rewards people’s talent and effort; and that there is perfect competition in the labour market. As we will show all of these assertions are on very shaky ground.
For this myth to be true, the best and brightest people in the UK would need to be in the most highly paid jobs. The best and brightest from across the world would need to be concentrated in a small number of countries that offered the most favourable conditions. Not only is this not true, but there doesn’t seem to be a reliable relationship between talent, entrepreneurship and income.
It would appear that according to a number of indicators, the reverse is in fact true. For example, there is a weak but significant tendency for more equal societies to gain more patents per head than less equal ones. More equal countries also feature heavily at the top of the list of the countries where the most books are published per head.66 Inequality, it could also be argued, wastes the talents of a large proportion of the population.
In a report for the Work Foundation, Life at the Top, the following insights were shared:
(1) Nearly 60 per cent of chief executives of FTSE-250 companies had worked in their firms for more than eight years, substantially above the average tenure of five-and-a-half years. This suggests that rather than there being a fluid market of top executives switching firms to capitalise on the best remuneration, companies nurture and retain their senior staff.
(2) Contrary to claims that the labour market for senior executives is global, 86 per cent of FTSE-250 chief executives are of UK nationality.
(3) While French and German chief executives are paid less than their UK counterparts, there is greater business productivity in France and Germany.Finally, it is not possible to square the causes of this recession with the idea that we are hoarding talent in the UK. Gross incompetence at the top of many of our banks has been directly responsible for the calamity of late 2008. Surely this isn’t the best our money can buy.
It isn’t.
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I have long thought that this is a myth and that the rates in particular industries just get inflated (look at how many mediocre players there are in the Premiership on colossal wages).
If that is the case, are not the directors of banks in breach of their fiduciary duties under the Companys Act for not calculating the minimum level they need to pay rather than automatically paying a large bonus in order to “keep their performers”?
We have tested the theory that high wages get you the best, to destruction. The test was even carried out in the banking sector so we know the answer to this question. This is as close to scientific proof as you can get in economics!
I’ve often wondered about the notion that only by rewarding key personnel significant multiples above a companies average wage can they hope to retain and attract the best talent. The same applies to the notion of the necessity of high returns for entrepreneurs. Obviously, high salaries are incredibly hard to unwind once the level has been established. Even the latest economic turmoil has not damped such excesses.
But the question that I have never had answered is this: Unlike a raw material that may remain in the ground if the commodity price does not warrant its extraction, will highly compensated individuals simply refuse to work or invest if their remuneration exceptions are not met? And as the answer to this is clearly no, is not the real problem the structure that determines such compensation is also being rewarded beyond its worth?