[Stu Littlefair]

sloper - I think the disparity is actually the point of the thread, so for it to 'miss the point' would be impressive. Perhaps you could tell us which point it missed?

As a question, do people think a 120x pay differential reflects the actual value added to a company by directors? If so, were directors hugely undervalued in 2000?

[Johnny Brown]

Must admit I'm intrigued as to why the top wages are increasing like this, now. Is it changes in tax rules? An increasingly global job market? Not read Piketty yet, but if it's all capital, why now? Are companies getting bigger? Easier to sell? Is this driving a greater disconnect between owner and worker? In the internet/ news 24 age are we making decisions based more on what we think everyone else is doing, rather than on our own sense of right and wrong?

I'm inclined to think it might be a general shift away from philanthropism. In the Uk, we could blame Thatcher's kids growing up. In the US, I guess the contradiction in the American dream is that if anyone can make it, those that don't have only blame themselves to blame.

[Sloper]

sloper - I think the disparity is actually the point of the thread, so for it to 'miss the point' would be impressive. Perhaps you could tell us which point it missed?

As a question, do people think a 120x pay differential reflects the actual value added to a company by directors? If so, were directors hugely undervalued in 2000?

While I have no answer to the question as to why directors/executive pay has increased inthe way that it has, the question as to whether they board/NED/senior management are sufficient value to justify their package is a matter for the shareholders. 

As for the stats, I haven't seen the data and how it is compared but I recall an article on 'more or less' where one company's wage bill was divided by the number of employees resulting in an apparently massive differential, but the headline figure didn't refelct the number of consultants so the actual multiplier was much lower.

If the package is substantially made up of equity/options then as the equity price rises so does the overall package, this is the very premise of 'moral hazard' and payment by results which senior pay should be judged on. 

Why do I say it really isn't the issue?  Well, the real issue in terms of the effects on society as well as individuals is the compression of pay rates at the lower (say 2-6th percentile) end of the spectrum and the ossification of movement and barriers between lower skilled/lower payed roles to higher skilled / higher payed roles.

In many areas there is now almost a standardisation of pay around the minimum wage and then a significant gap to something approaching the median / modal average.  It is this and the inequality that this creates that is of greater import in my biew.

Those that want a aggregate cap on the multiplier (until you reach a figure of say 50/60) are I am afraid deluded fantasists. 

Take our firm (and I use the royal we here), we have a post room where the wages are above NMW but not an awful lot, let us call that the denominator and posit that they're on £10k, if we impose a cap on the senior equity partner of say 12x, this gives him a package of £120k.  Now £120k is not a breadline salary, but let's work it out, where do we place the client services team, their manager, the secretaries, their manager, junior fee earners, senior fee earners, solicitors, associates, the IT guys, HR manager and so on on the scale?

You need differentials to maintain staff morale, allow for promotion and so on, if there was a cap on the aggregate then to maintain these necessary differntials the datum point would need to be pushed down.

Ahh but I hear you say, people would want to get on, they'd want the promotion and everything that goes with it, well that's true to a degree particularly in theory but in practice it is bollocks.

Let's say I was in an organisation with a remuneration structure based on a multiple of the lowest salary and the next increment was Seniro Manage 1 with an additional £10k.  Sounds good doesn't it, but the difference between Manager 3 and Senior Manager 1 is that SM1 don't get TOIL, O/T, have to go to client evants at weekends and the evening and is of course a more stressful job.

A £10k pay rise roughly equates to an extra £400 per month (as a higher rate tax payer) when you factor in the O/T TOIL, not having to spend weekends/evenings with boring clients and so on, it just doesn't seem worth it.

Why would a senior salaried partner want to be an equity partner and put everything they own on the line for an extra £800 per month?  Unless they were insane they wouldn't.

So, in short, limting / capping salaries on a multiple of the lowest wage is impractical as it limits scope for promotion and staff development and also compresses the wages at the bottom (as there tend to be more indians than chiefs) to allow for greater differentials higher up.

Of course this is also slightly fatuous in that the executives will find a way to pay themselves via other methods.  Lord  Rogers the famous architect has I think salary cap of x17 between himself and the lowest paid, great you say, well there was an interesting story in The Eye which suggested that the cap was regonised more in its avoidance than observance.

[Johnny Brown]

I doubt anyone has much beef with that.

But as you say:

I have no answer to the question as to why directors/executive pay has increased in the way that it has

Neither have I. I think that's why we've got an inequality thread.

Are the companies 2.5x bigger? Or is it the result of telling a generation that 'there is no such thing as society'?

[shark]

sloper - I think the disparity is actually the point of the thread, so for it to 'miss the point' would be impressive. Perhaps you could tell us which point it missed?

As a question, do people think a 120x pay differential reflects the actual value added to a company by directors? If so, were directors hugely undervalued in 2000?

While I have no answer to the question as to why directors/executive pay has increased inthe way that it has, the question as to whether they board/NED/senior management are sufficient value to justify their package is a matter for the shareholders. 

In theory yes but the fragmented nature of share ownership, the inertia of most institutional investors and such issues as shares being held in nominee accounts by most private investors are just some of the factors that mean it is rare for pay to be voted down at annual meetings - only a small % of the "owners" actually even turn up. There are moves to improve "shareholder rights" but I wont hold my breath as such complaints have been made for over 50 years (read Benjamin Graham on the subject) and there are plenty of ways for Directors to game the system on bonuses and share options too. Good Directors can add value many times their earnings whilst bad Directors can drive a business to the wall but the reward structure is never perfectly aligned to performance. At least in the round they are driving the economy  unlike footballers..   

[Jaspersharpe]

Hmm. Not sure that comparison works as footballers getting paid obscene amounts of cash are probably more likely to be spending a large proportion of it on pink Bentleys, £5k a night hotels and big headphones.

Although this is obviously quite horrible, it's still "driving the economy" in a way whereas the CEO of (e.g.) Vodafone deciding to cancel phones 4 u's contract just saved his company a load of cash in the long run but cost a few thousand people their jobs.

Yes, I'm being intentionally simplistic, just trying to say it's not as clear cut as the statement you made.

[Sloper]

I doubt anyone has much beef with that.

But as you say:

I have no answer to the question as to why directors/executive pay has increased in the way that it has

Neither have I. I think that's why we've got an inequality thread.

Are the companies 2.5x bigger? Or is it the result of telling a generation that 'there is no such thing as society'?

The point is the inequality of the top.1% just isn't a material issue.

Globlisation will be a factor, increased property prices will be a factor 'transfers' will be a factor, but none of this is a factor in respect of how the vast majority of us are remunerated, which surely is the issue when we come to discuss wage inequality.

[Stu Littlefair]

V interesting stuff guys. So, a fair summary would be that pay for CEOs and board members has risen so rapidly because of changes in share ownership, but it's not really important because it's the suppression of pay at the bottom that really matters, not what the top .1% get?

I think I broadly agree with all of that but I have some qualms about the latter point. It's not that I think executive pay has a bad material effect but I worry it has a corrosive social impact.

[Johnny Brown]

over the last 30 years the very largest firms have got much larger through globalisation. Larger revenues means increased scope to ramp executive salaries without impacting margins too much (see my previous post).

Interesting, that's as I suspected.

To reply to Sloper, ultimately I think how the majority are remunerated must be significantly influenced by the attitude of the management. Partly this can be explained in the same way - the bigger the company the more the workforce become commodified. But I suspect there is also a change in attitudes at the top. For example the collapse of Russian socialism has been replaced a kleptocracy of oligarchs. I surmise that the narrowing of UK politics towards the centre right may cause a faint echo of that, and the more we see these top salaries in the news the more other managers will tend to follow suit.

[Sloper]

V interesting stuff guys. So, a fair summary would be that pay for CEOs and board members has risen so rapidly because of changes in share ownership, but it's not really important because it's the suppression of pay at the bottom that really matters, not what the top .1% get?

I think I broadly agree with all of that but I have some qualms about the latter point. It's not that I think executive pay has a bad material effect but I worry it has a corrosive social impact.

I wouldn't say that executive pay has increased because of a more diversified share ownership, rather that senior pay has become a package of equity and cash, so, perhaps before 100k was 100k in £ now 100k is 30k in cash and 70k in equity to be realised in +3 years, of course if the £70k becomes £200k over those three years  then the overall package  becomes £230k.

In respect of the social impact I doubt that the public has any real idea as to what the average director of a SME (say up to £20Million turnover) actually earns and if they have no accurate idea then there can be no material social impact.

[Stu Littlefair]

Ha! I'd have thought the reverse - a perception of obscene directors pay, coupled with ignorance of the actual level was the perfect setup for increased resentment and reduced social cohesion...

Wrt your first point, has the blend of equity vs cash changed much over the last 20 years then?

[Johnny Brown]

I wouldn't say that executive pay has increased because of a more diversified share ownership,

Really? Companies get bigger, and investments are increasingly managed by intermediaries. Shareholders no longer have any interest in how a company is run other than share performance. Execs can pay themselves what they like with less scrutiny from stakeholders than in the past.

[shark]

V interesting stuff guys. So, a fair summary would be that pay for CEOs and board members has risen so rapidly because of changes in share ownership,

I dont think that's the full story but certainly there are more direct checks by Managers over Employees wage growth than there are by shareholders over Executive pay which go some way to explain the widening gulf over time.

Another factor I think is the psychology of those at the top and the (often cosy) relationship with the remuneration committee. The committee will want to attract and retain upper quartile Executives and so feel justified in paying upper quartile salaries. CEOs are generally accomplished at selling their worth, highly competitive with high opinions of themselves and would expect to outperform their peer group. Of course everyone selling themselves into the top quartile means the goal posts quickly move it to be the middle quartile and so on.

The irony is that these Executives care less about the  actrual £quantum of their rewards and more about the cachet of being recognized as a high achiever. There was a study done on Harvard? undergraduates who when asked overwhelming preferred the idea of being paid lower if that represented the top quartile of pay than being paid more if it represented the bottom quartile. Nuts innit.

[shark]

Hmm. Not sure that comparison works as footballers getting paid obscene amounts of cash are probably more likely to be spending a large proportion of it on pink Bentleys, £5k a night hotels and big headphones.

Although this is obviously quite horrible, it's still "driving the economy" in a way whereas the CEO of (e.g.) Vodafone deciding to cancel phones 4 u's contract just saved his company a load of cash in the long run but cost a few thousand people their jobs.

Yes, I'm being intentionally simplistic, just trying to say it's not as clear cut as the statement you made.

These CEOs are doing more for the global economy in how they run their businesses compared to how a footballer spends their pay packet. To also be intentionally simplistic capitalism (and its captains) have an inherent drive for efficiency which means that there will be local losers but for the globe there is a huge net gain with it dragging vast swathes of the world population out of poverty with low cost economies then becoming medium cost and so forth. The trick for policy makers is not to fetter this force for (generally) the common good whilst reining the the worst excesses/byproducts by which I mean things like child labour, corporate manslaughter, pollution etc rather than executive pay which to my mind is 90% a populist pastime for politicians and 10% of genuine concern - certainly not justifying the disproportionate amount of attention it gets.

[Sloper]

V interesting stuff guys. So, a fair summary would be that pay for CEOs and board members has risen so rapidly because of changes in share ownership, but it's not really important because it's the suppression of pay at the bottom that really matters, not what the top .1% get?

I think I broadly agree with all of that but I have some qualms about the latter point. It's not that I think executive pay has a bad material effect but I worry it has a corrosive social impact.

Share ownership is now more diffuse than probably at any time in history, I have no data (I expect Andy Popp is the chap to answer whether this is correct) but I can imagine that share options as part of remuneration packages became more common after the liberalisation of the markets in the 1980s, is this valid Andy?

Of course taking part of your package in equity when prices are generally rising is far more attractive than in a slump / bear market.

There of course real questions as to the efficacy of the control the remuneration committees have, old boys sitting on each others panels, institutional share holders not wanting to make a fuss and so on, I just don't see that there are many other more effective options, however this will evolve if there is a perception that there's no moral hazard in setting pay i.e. a bonus for failure.

The impact of inequality on society is always to be felt most significantly at the left end of the distribution curve as the dick waving my mega yacht is bigger than your super yacht while fairly unattractive does not lead to any great social upheaval.

This is why the real issue, in my view is between say the minimum wage shelf stacker earning £10k and the teaching assistant earning £13k, are we really saying that after tax that differential is sufficient to attract people in to be TAs rather than shelf stackers at Tesco?

[andy popp]

V interesting stuff guys. So, a fair summary would be that pay for CEOs and board members has risen so rapidly because of changes in share ownership, but it's not really important because it's the suppression of pay at the bottom that really matters, not what the top .1% get?

I think I broadly agree with all of that but I have some qualms about the latter point. It's not that I think executive pay has a bad material effect but I worry it has a corrosive social impact.

Share ownership is now more diffuse than probably at any time in history, I have no data (I expect Andy Popp is the chap to answer whether this is correct) but I can imagine that share options as part of remuneration packages became more common after the liberalisation of the markets in the 1980s, is this valid Andy?

On the first point, Yes and No. Probably (not really my area). We are almost all shareholders now - but largely through proxies (pension funds especially). We have not become the nation of shareholders/shareholder democracy desired by Thatcher or apparently promised by the early  flourish of the day-trader movement (and, for me, the recent Post Office privatisation demonstrates the current Tory party has no meaningful commitment to the concept). The individual private trader cannot hope to compete with the massive computing power that allows the financial institutions to make huge volumes of trades with enormous rapidity. So, more of us own shares but we are arguably more passive and more fragmented than ever before (and the information asymmetries greater than ever before). The US in the early C20th was probably much closer to a shareholder democracy with widespread and active popular share ownership and considerable, sometimes effective shareholder activism. Now, to use Hirschman's terms, loyalty and exit are the only options left to shareholders, voice has been largely degraded.

Share options as part of CEO remuneration packages probably really took off somewhat later than the 80s liberalisation - in theory they exist not to reward to bosses but to counter the agency problem (Jensen and Meckling), in other words, to align the interests of agents (managers) with principals (owners, who are dispersed, fragmented and face massive information asymmetries). They should stop managers pursuing their own utility and essentially emerged in response to governance crises/scandals. However, as Enron and other cases show, they have been very open to abuse by aggressive managers aided by weak boards, friendly remuneration committees, and co-opted auditors. 2007-8 demonstrates that corporate governance remains vulnerable, despite many reports, committees and acts.

Managers have proven very well-placed to leverage the processes of financialization that have undermined shareholder voice.

[Sloper]

Thanks for the detail, if we take the premise that packages wit ha a significant equity component are a fairly recent phenomena then we need to look at director / executive pay with a datum point of say 1987? and plot this against say the Dow Jones / FTSE (excluding perhaps the likes of Microsoft, Apple, Google, Facebook and so on as these will substantially distort the pattern) and see how the plot changes.

If the plot fluctuates consistently (with lag for the option to be exercised) then we can say that in broad terms the underlying cause of the increase in the packages has been in the increase in the value of the companies / equity prices. 

If it doesn't then we need to look at other causes.

Similarly I think its also worth looking at wages t the other end of the scale as globalisation has resulted in many roles which would have been ^£ either becoming redundant or having to be paid less due to tighter margins, for example typing now is not the skill it once was.

[shark]

Share options as part of CEO remuneration packages probably really took off somewhat later than the 80s liberalisation - in theory they exist not to reward to bosses but to counter the agency problem (Jensen and Meckling), in other words, to align the interests of agents (managers) with principals (owners, who are dispersed, fragmented and face massive information asymmetries). They should stop managers pursuing their own utility and essentially emerged in response to governance crises/scandals. However, as Enron and other cases show, they have been very open to abuse by aggressive managers aided by weak boards, friendly remuneration committees, and co-opted auditors. 2007-8 demonstrates that corporate governance remains vulnerable, despite many reports, committees and acts.

Yes the theory is good but like you say in practice Execs can play the game to their advantage - if their bonuses are based on EPS (profit) growth they can flatter that by borrowing to finance share buybacks, if it is based on share price then release bullish trading updates, if based on increased turnover then make duff acquisitions. Founders who float their businesses have been known to later buy the company back at a much lower price later on. If memory serves me right the Founder of DFS pulled this off a couple of times.   However, not all Execs are in it to rip off shareholders and abuse is a minority practice though more common and in the less regulated (and less professional) small company AIM market.   

[andy popp]

If the plot fluctuates consistently (with lag for the option to be exercised) then we can say that in broad terms the underlying cause of the increase in the packages has been in the increase in the value of the companies / equity prices. 

I think the data is extremely unlikely to show that: http://www.businessweek.com/articles/2014-07-22/for-ceos-correlation-between-pay-and-stock-performance-is-pretty-random

(just one small piece of evidence I found within about 5 seconds).

[andy popp]

I agree Shark, clearly not all bosses are out to game the system. In fact a big problem I have with principal-agent theory is that automatically confers virtue/wisdom on ownership and similarly views all agents as self-interested.

[andy popp]

C'mon, the idea that media promotion of day trading is a major cause of inequality in Britain is risible. The term is so lost and arcane I actually had to google to check I'd remembered it right. A lack of capital to commit to the long-term, not distrust of the financial markets, is what is stopping people from gaining from share ownership.

[Johnny Brown]

Hmmm. I'm not sure of the relevance to the inequality debate, but I'm fairly confident many of my generation have a distrust of the financial markets and are far more likely to put money in housing. In the last fifteen years I've heard lots of stories of pension funds performing poorly while house prices have trebled.

[Sloper]

And in many ways that mistrust has been well earned, however if you earn £25k and can invest say £200 per month investing in property isn't a realistic option, so what's left? Equities, a bit of precious metal or a pension pot?  For most it will be the pension pot.

The one thing is certain, you can't rely on the state pension any more, not unless you fancy the Stoney Woodshed in 2040.

[Oldmanmatt]

Hmmm. I'm not sure of the relevance to the inequality debate, but I'm fairly confident many of my generation have a distrust of the financial markets and are far more likely to put money in housing. In the last fifteen years I've heard lots of stories of pension funds performing poorly while house prices have trebled.

Yes, but that is substantially different to buying and holding long term, shares in specific companies.

Pension/hedge funds are gambled daily, spread bets to be sure, but gambled none the less.

Imagine holding shares in Apple from twenty years ago...

[andy popp]

C'mon, the idea that media promotion of day trading is a major cause of inequality in Britain is risible.

You are massively and obtusely misquoting me there, Andy. But this is not a day I wish to spend on the computer so let's leave it at that.

If I am then I promise its not deliberate. In all honesty, I reread your post a number of times trying to understand it differently. I actually think parts of my own world, the academy, are far more culpable. Let's put it down to miscommunication.