It should come as no surprise to anyone that UK chief ex3cutive pay has risen by 11% in the last year. This, of course, vastly outstrips the rate of increase for almost anyone else. It is also wholly unrelated to any real-world performance, except growth in share prices.
But let's be clear. Many of these chief executives help rig share prices through their share buyback schemes that are intended to keep shares in short supply, and so prices high. This makes the CEOs look good. And it increases the value of the CEO's share options. They have every incentive to play this game.
And despite protests, there is no reason for them not to do so. Shareholders still cannot constrain pay. There is no maximum pay law. Whatever is paid to a CEO is considered a legitimate tax-deductible expense in the accounts of the company that pays it. And the pension industry - stacked full, as it is, by sycophants who want to ‘make it in the City' - by and large never says boo to a goose.
So what is happening? Rent extraction is happening. These CEOs do not earn their reward. Nothing says they are worth the sums paid. They are paid this much because they can take this much. And this is what economuc rent is. It is the amount paid for a resource in excess of that needed to secure its use in a process.
And why is it paid? Because power structures are created to permit its payment.
Who bears the cost? Society at large. Other workers, here.
Rent is a redistribution of resources from those without power to those with it.
From worker to executive.
From shareholder to executive.
And more broadly, from tenant to landlord.
Or from credit card borrower to bank.
Or developing country to tax haven.
Power has been created to extract these rents. The CEO pay fiasco is just an example.
And never once let it be said these people are entrepreneurs. Entrepreneurs work in markets. These CEOS rig markets until they cease to exist. And then pay for the propaganda of ‘free market' mythology.
And yes, that makes me angry.
Why the heck not?
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There’s a word for it – looting . Or if you prefer, Bill Black’s description, ‘ control fraud ‘ .
No doubt some neoliberal will be along soon to point out that the FTSE is constantly self-selecting for success. Companies drop out if they perform worse than they can. Did leeway get given by the Guardian writers to allow for the effect of the drop-out companies whose CEOs will have reduced or dropped to nil if the company has gone under.
Someone will also point out that HMRC collecting 53%+ of the extra employed earnings of the executives means more money for the Exchequer who can then spread it out among lower income workers in the public sector and this is a better outcome compared to spreading the same amount among lower income workers for the FTSE company. They fail to realise that this is not the point of taxation.
[…] Read here […]
The legal structure in which corporate culture functions does not work, and has not worked for decades. It may be recalled around twenty years ago there was a great fuss about the need to ensure corporations, and executive pay were controlled by independent non-executive directors: that went well, didn’t it?
The supposed democracy of shareholder power; that the majority of shareholders are, by definition in charge of the company and direct it, is an illusion. Only they don’t; that it not how it works. In the modern world of international institutional shareholders, pension funds; of professional investment institutions that are themselves corporatised in both structure and more important ‘culture’, that is not how control works.
Large modern institutional shareholders of large corporations do not like the spotlight; and do not wish to find they are ‘taking charge’ of the direction of the corporation they are invested in through the exrecise of a vote. Indeed, finding they are effectively directing the company by voting at a general meeting is the last thing they want to do. So they don’t. What do large institutional shareholders actually do?
They invest in the company by backing the management and buying the shares. If they no longer have confidence in the management they have a single decisive action: they sell the shares and move on. They do not decide to begin to do the company’s job for it. If they no longer trust the management with the direction of the company they sell the shares; unless of course the shares are held in order to to track an index, in which case the holding is an abstraction, and they have even less interest in the management. As a matter of functional reality institutional investors have no interest in democracy; unless asked, when of course public relations requires the polite repetition of platitudes. Only very very rarely and reluctantly will institutional shareholders vote against the management, or vote out the management, or nit-pick over self-serving or excessive pay rises.
The institutional shareholders who are active in the democracy of shareholding (control through votes, which they may use actively against the sitting management) are typically niche specialists; professional corporate brawlers, vulture capitalists, hedge funds, predator-scavengers who smell a decaying carcase.
John,
Excellent points about institutional shareholders.
Interesting to note ,for example, that: “In the United States, corporations generally were not permitted to own shares of other corporations until late in the nineteenth century. With this development, described as a turning point in American business history.”
https://opencommons.uconn.edu/cgi/viewcontent.cgi?article=1027&context=law_papers
A turn for the worse it was too. Objectively, overall, I can’t think of a reason why that old prohibition shouldn’t be reintroduced.
If anyone does discover a genuine problem with that suggestion I’m fairly sure that I could solve it for them and if I can’t I am certain there will be someone that can.
Well done for homing in on rent extraction. And it’s not rent seeking, the anodyne term that so many economists use to gloss over the damage that’s done. Rent-seeking is a major driving force in markets and capitalism and, in itself, is not harmful what is harmful, and doubly harmful, is the sustained capture and extraction of economic rents as this activity extracts returns and rewards that are not justified, in the first instance, and then the perpertrators are prepared to spend almost as much as they extract rigging the system to ensure the continued extraction of these rents.
And you provide a number of examples of sustained rent extraction that demonstrate how endemic and pervasive it is. But you could go further and talk about rent extraction from consumers and service users by suppliers and providers. I work on the basis that every large company dealing with the public is a conspiracy against the public. But it’s not just banks. My daily dealing with energy suppliers, supermarkets, phone service and internet providers, insurance companies and all other largely utility service providers have provided a mountain of evidence of predatory and abusive behaviour.
I accept that the standard approach on the left is to attempt to tax these rents away or to take activities in to state ownership and control. There may be some justification for this. But there also appears to be a gradually growing awareness that much of this abusive rent extraction is due to increased consolidation and concentration, the emergence of oligopolies tacitly colluding, declining competition, failings of competition law and its enforcement, totally laughable regulation (with a revolving door between regulators and the regulated) and the subborning of politicians and public officials.
Because so many on the left either loathe and detest market mechanisms or have no understanding of them it is difficult to secure the plurality of democratic consent required to enforce both effective taxation and effective competition and regulation that would curtail this pervasive and sustained rent extraction. Both policy mechanisms are required. One on its own is insufficient. The challenge is to build the plurality in favour of both.
Paul,
Good point, I tend to agree.
I’d just add two things:
Firstly that psychologically and therefore politically preventing monopolies/oligopolies and rents is superior to taxing the proceeds because property rights are so well engrained in all of us that heavy taxation is widely unpopular.
S
Secondly that in a practical sense “leaks” to rents make it very difficult to foster a stable and balanced political economy. If aggregate demand is too low then you want less tax not more tax yet, in an economy with a lot of rents you need to tax the rentiers heavily and then put more money back in the hands of the non-rentiers but, while the rents exist the money just ends up back in the rentiers’ pockets.
In my opinion you’ve got to plug the leaks (via regulation of the market to provide a perpetual level playing field) as the first priority and only bail out the flood waters (via tax) as a last resort.
What is sometime called the “golden age”, from post-war to early 70’s, when economies were booming, and inequality was less than it is now, tax rates were very high at the top – into the 80’s & 90’s percent. It’s been argued this was a disincentive for execs to reward themselves with bonanzas as they would be taxed away.
Adam,
Thank you. Those of a genuinely liberal inclination in matters economic and political (even if they are far fewer than they used to be) are repelled by an excessive reliance on taxation and state ownership and control.
The irony is that when left and right agree on something in this area (with even some support from the Murdoch and Rothermere press) we get something totally inappropriate and self-defeating such as the Domestic Gas and Electricity (Tariff Cap) Act 2018 which received Royal Assent last month without a division in either house. The suppliers will game mercilessly whatever price cap the hapless regulator, Ofgem, will impose. The most effective means of preventing consumers who stay on high tariffs for whatever reasons from being ripped off is to offer the suppliers the opportunity to bid to supply groups of these consumers for a defined period of time in declining clock auctions (with the consumers given the right to opt-out). But our current crop of parliamentarians (across the political spectrum) either lack the intelligence to get their heads around this or like most of the public officials with the specific knowledge and competence do not wish to cut-off the possibility of future employment or reward in the energy industry. Among the armies of tame academics and professional flunkies and functionaries there is no incentive to act in the public interest by advancing a proposal of this nature. Why would you bite the hand that feeds you?
Adam,
“preventing monopolies/oligopolies”
Is a high priority but often not possible due to natural monopoly and economies of scale.
Well said, Richard. Agree 100%
If anyone wants to see a solid debunking of ‘CEO’s are worth that much’ along with how they manage to get their pay up there to begin with: https://www.nakedcapitalism.com/2015/06/new-study-debunks-myth-that-exorbitant-ceo-pay-results-from-talent.html
Also a good article in Forbes earlier this year – https://www.forbes.com/sites/shelliekarabell/2018/02/14/executive-compensation-is-out-of-control-what-now/#6caab22431f2.
Do free markets actually exist? Letting ‘the markets’ decide outcomes seems to be the dominant part of neoliberal thinking, a lot of suffering occurs as a result of this. But as soon as an interference occurs, such a applying a tariff, surely the markets are no longer free? So even if a person is a free market fundamentalist could they actually find a free market.
CEO pay is another example of the idea that markets determine outcomes where that market is being manipulated.
Slaine,
Free markets can exist but not in the absence of rules and regulations to keep them free and fair.
Markets are just elaborate games. Imagine football without fairly enforced rules. The game would rapidly deteriorate into a simple fight where the strongest and most vicious win. Maybe it would still be amusing to watch and the winners would be happy with it. It just would no longer be football.
What the current winners of the rigged market game do is use propaganda to convince the voting public that only their rules should be enforced but even those rules should not be applied to them.
They claim the result is a “free market”.
It isn’t.
Don’t be fooled but also don’t leap to the opposite extreme view that markets have nothing to offer.
Thank you. And thus the need for a mixed economy.
Michael Hudson is also very good on economic rent, e.g.
https://www.youtube.com/watch?v=Elg6i3NxvdE
There is a cascade of negativity surrounding share buybacks on this forum , some of which I agree with. Can anyone think of anything positive?..after all no discussion is entirely one way!
Go one
Tell us why they add to the well being of society as a whole
Stop complaining and do something
[…] discussed rent-seeking in the context of CEOs yesterday. I will suggest there is rent-seeking in these firms as well. What is very apparent is that just as […]
Last night on Channel 4 news I watched a mini debate on this issue.
The person who was supporting the current CEO set up was a young, lively afro-Caribbean woman dressed in a red dress more commonly seen at a cocktail party (very clever!). As the ‘debate’ moved on (her adversary was an older white woman) the CEO advocate seemed to agree that those CEO s who ran their companies into the ground were not so good but kept advocating that if performance and ‘innovation’ increased profits then the CEOs were worth it.
There was no examination or consideration given to HOW those profits were made (share buy backs, outsourcing, asset stripping, HR abuse) at all. At all.
These days, people briefed on dealing with the media are there to deliver a message and not answer the questions which young woman ably demonstrated.
My view is that increasingly the news should just try to report and not create ‘debate’ (debacle?) like this that because of time constraints touches on the subject like a stone skipping the surface of a pond.
We don’t need in depth reporting either in the form of a investigative documentaries (no matter how good) that get crowded out by the TV schedules or compete with the likes of ‘Love Island’ and ‘Blah Blah Bake Off’.
What we need is a proper public enquiry. That is what we need. A public enquiry into CEO behaviour in Britain.
CEO=
Continuously
Exploiting (their)
Organisations
Once more can I draw your attention to Aeron Davis’ book ‘Reckless Opportunists’: Elites and the Establishment (Manchester University Press, 2017). He kicks the door in on the whole rotten CEO edifice and pulls no punches.
Anyone know who the people were?
Here you go:
https://www.channel4.com/news/sacha-romanovitch-grant-thornton-ceo-i-capped-my-salary
I watched it too – red dress parroted the standard line of ‘they only get paid that much because they are so good at what they do’. An argument that could easily have been taken apart with even a modest amount of research.
The other lady looks rather more interesting
https://www.director.co.uk/sacha-romanovitch-ceo-grant-thornton-interview-profit-sharing-salary-economy-17077-2/
She appears to be trying to practice what she preaches. . A refreshing change from the usual feudal culture of accounting partnerships and consultancies
Bianca Millier-Cole gave us economics (or maybe business studies) 101 and it was nonsense
Sacha Romanovitch was much more balanced
Robin
You’ve put me to shame – but at least I now know that Miller-Cole was not just a bad dream.
Worse still – Miller-Cole made no connection between the so-called ‘innovations’ and how short term high performance can be prelude to long term collapse (think of Enron and more recently Carillion).
In other words we can quite reasonably expect any high performing corporation to come off the rails and into the catch pit at anytime – its’ the new normal.
Great!
PVSR – (always make me think of the Hendrix track…) – my response to the Ch4 piece was much the same as yours, though if MCs response is the best they can do in defence of CEOs, there is some hope.
As others have pointed out, there is plenty of material showing that the links between CEO pay and performance are tenuous at best. You don’t have to go to the usual suspects who’d be naturally critical of business – even the likes of Harvard and Mckinsey have been on the case for years. Then there’s all the financial engineering that goes on to boost short term profits and share price including share buy backs, sell offs, outsourcing and the many schemes that weaken companies in the medium term, often mortally. By which time the CEOs and directors have moved on, taking their bonuses with them.
Shareholder Value is one of the most destructive ideas ever to infect the business world and CEO pay is the most obvious symptom. Fair play to Sacha Romanavitch for seeming to break that mound. Need a lot more like her
The simple example I use is this line of argument.
Dear Ceo
Did you to the best of you ability make the best choices for the business last year? Yes
Then explain to me how you can justify 10% more pay. Did you work 10% more time or make 10% better choices than the best you did last year. ?
I would contend you are gaming the system and picking our pockets as shareholders and investors. Otherwise your pay increase is blackmail demanding more pay otherwise you will threaten to ruin our investment.
Do you blackmail large investors that oppose you or just frighten them away?