Even eyes in the US are starting to pop at the sheer extravagance of executive pay. Last week, the New York Times published its annual league table of chief executive pay at the US’ top 100 publicly quoted companies. The average has now climbed to US$13.9 million.
That is nearly twice the average of ￡4.4 million (US$7.41 million) for chief executives within Britain’s top 100. However, since the US’ top 100 companies are, on average, about three times larger in terms of turnover than our own, one could argue that executives are even better paid in Britain.
A growing number of US commentators are asking, as are some of the braver remuneration consultants, just why executives in the US need to be paid so much. The Los Angeles Times headlined one opinion piece “Obscenely high salaries are stark reminders of US wealth gap.”
The New York Times talked about the dark side of executive pay driving US inequality. What do these men — and 91 of the 100 are men — actually do with so much money?
The rationale is that such pay is needed to drive “performance.”
One of the eye-catching examples was Oracle cofounder and chief executive Larry Ellison, already the world’s fifth-richest man, who collected US$78.4 million last year. Does he need so much cash to push Oracle’s performance, and if so, why does Google cofounder and chief executive Larry Page need only US$1 million?
It was true that 26 chief executives on the list saw their remuneration fall slightly, but that was more than offset by some astonishing and quirky rises. A fall in any one year is compensated by a vast increase later.
It is beginning to be obvious that performance has hardly anything to do with the rise in executive pay. Why should British chief executives in charge of smaller, generally less complex companies be paid proportionally more than their counterparts in the US? Does it make sense that 60 percent of pay comes in options to buy shares, so that executive focus is wholly on doing those things — cutting investment, avoiding risky innovation, using cash to buy company shares — that keep up the share price.
Chief executives’ pay has been sky high in the US for a decade and has doubled in Britain over the same period, but has economic and corporate performance been that stellar in either country?
Some economists argue that it is the direct cause of the collapse of business investment in both countries. Even the most eloquent apologists are increasingly mute.
The answer is that these “super-salaries” have almost nothing to do with performance and everything to do with chief executives keeping up with each other in a status race.
In my interim review on fair pay for the UK government three years ago, I noted that one of the best determinants of any chief executives’ pay in the US was the size of their social network. The more examples of highly paid members in one’s network, the more generous a remuneration committee felt it had to be.
Ellison will doubtless point not to other chief executives of publicly quoted companies to justify his pay, but to Leon Black, chair of the private equity group Apollo, who pocketed US$546 million last year.
In Conspicuous Consumption, a book published in 1899, when inequalities in wealth and income matched those of today, economist Thorstein Veblen captured this social dynamic well. There is a logic to the very wealthy needing more wealth: They show it off to demonstrate where they are in the pecking order.