

Executive pay

Bosses under fire

Britain is a case study in how politicians miss the point when they try to “fix” executive pay

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Readers' comments


Edward Harkins

A disappointing dog’s breakfast of an article, given that it is a Leader for The Economist; it’s just inadequate and irrelevant. The authors seem, only seem, to acknowledge the problems of undue and unjustifiable top pay, but then don’t really want any anything done about it.

There is an unctuous reference to unjustifiable earnings inequality to be, ‘…feeding the view that there is something wrong with British capitalism'. There can be few competent, thinking persons in the UK who does not believe that there is currently something fundamentally wrong with British capitalism. So let’s be honest and explicit in our recognition of this challenge.

Indeed, all the authors offer are some tinkering and displacement activity, along with criticism of what (admittedly inadequate) actions the politicians are attempting. The authors also fall way short of an explicit acknowledge that this is not a problem (just) for the politicians and the sorely aggrieved other citizens – it’s a problem that started with the high earning global-flighty elites, and it is they who continue to defend the status quo.

The authors also fail to explicitly finger the Anglo-UK model economies as the ones where gross and growing, unjustifiable, inequalities are at their worse – as is the potential for associated costs in: dysfunctional economies; political and social cohesion; and health and wellbeing.

An Drew

Now it could be argued that part of the boom in executive pay in Britain is due to globalization--but it's a globalization that has always been there, and it is the intertwining world of business in the Anglo-Saxon world. It is because the economies of Britain and America are so tied together that the skyrocketing executive pay in the US has pulled executive salaries higher too. So it is not your usual kind of globalization.

The two countries in the industrialized world that have experienced an astonishing growing rate of economic inequality are the US and the UK. Now the reason for such growing inequality in the US, I argue, has been politically. Nevertheless, this has had its spill-over effect on the UK as well.

Banker Bob

And Footballers earn how much per annum? And adding what value to the economy? Don't hear too many (Liberals) complaining when they have to fork out some dosh for a game of footie

Werner S

And of course, the trend towards ever higher rewards at the top co-incided neatly with governments' previous efforts to make C-level pay more transparent. If it was counter productive then, I see no reason why this should not again be the case.
Makes/made it nice and easy for CEOs to argue: look what my couterpart in company or country X is earning, leading to an upward rather than downward spiral.

Fiscal power

High executive performance based pay has some perverse incentives, partly because the time period for evaluating performance is too short. If a CEO can show 2 or 3 years of high profit growth the performance compensation could set the CEO up to live lavishly for life, even though he laid off workers, skimped on maintenance and lowered the long term profitability of the company.

Annual earnings of the S&P500 had record volatility in the last 10 years, while also growing below the historical pace. CEOs benefit from this volatility in earnings because it creates monstrous earnings growth for periods long enough to get the pay bonanza.

In managing companies to maximize their pay bonanza CEOs use debt as leverage. While companies have record amounts of cash the balance sheets are not strong; they also have record amounts of debt. Because their time frame may be as short as three years CEOs may bet the company on some risky course. CEO actions have become pro cyclical making bigger swings in economic growth.

There are probably several solutions. One might be to put a 90% marginal tax rate on the portion of performance based pay above a million dollars if the period of evaluation performance was less than 8 years.

So a CEO could get up to a million dollars in performance pay in any given year with no extra tax, but to get the big after tax performance pay requires performing for at least 8 years. This would not limit the pay to CEOs with genuine well used talent, but would eliminate much gaming of the system that destroys rather than creates long term wealth.


Repeat a lie often enough, and it becomes the truth. Are bosses paid a lot because they are excellent, or are they excellent because they are paid a lot? Or do they take the money not because they deserve it, but because they can?

Grade inflation has been a problem for years, and in many sectors. Education, for instance, where top "A" grades are now awarded to over 20% of students taking GCSE.

But this academic inflation is beaten hollow by 'grade inflation' in executive pay.

The assumption in this article is that high pay is paid for 'excellent performance'. But a quick look at the 2010 Lloyds and RBS company reports, (Dear Economist, it's in the bit about remuneration,) and you will see that to lose his bonus the 'excellent exec' needs to come in the bottom 50% of his comparator group. The top 50% are deemed to have excelled.

I would be very impressed, surprised, and shocked if the government implemented this 'binding shareholder vote' before it had dumped its mighty shareholdings in RBS and Lloyds Banking Group. Like the mice in Aesop's fable, politicians have the courage to legislate a bell, but they'd rather not have to tie it to the fat-cat.


This article falls below, well below, the standards of this paper. It is poorly articulated, poorly argued and fails to find a foothold for any common sense on which to stand.
The article boils down to: Executive pay has increased because executive pay elsewhere has increased. And this is somehow justified because it is a global world. Whereas back in those steam engine and whale oil days of 2000, good executives needed only know basic multiplication tables and were happy to have a steady job.
The hard truth is good bosses are paid obscenely well, are rarely as good as their records indicate (and are often fired when their goodness expires), and companies drastically overpay for shortterm phantom growth. Add to this that bad bosses far outnumber good bosses, yet are also paid obscenely and cause lasting, irreversible damage to a company's success and you realize: how much the top executive gets paid is tied to how much they can get away with without killing the golden goose.


This is one of the worst TE article I have read in years.

What is shocking is not that TE favors exorbitant executive pay but rather the arguments that this magazine put forwards. In nutshell TE says- executive pay should not be curbed because it is less than compared to US executive pay. And the most funny part - If the executive pay is tied to long term performance, then the pay would rise, because executives have to wait for their bonuses for a longer time!

The arguments are so ridiculous that one is forced to think whether TE is exorbitantly paid by executive lobby to print whatever crap it could come up with to support exorbitant executive pay.


Managers should be compensated for their added value, but in the financial sector, in which I work, I have difficulties finding their added value. For a decade they just increased earnings by increasing risk-taking thanks to low volatility. When, surprise surprise, volatility came back, their companies would have all gone bankrupt one after the other if it weren't for us taxpayers. So where is the added value here? Where is their incredible, unique, global talent? They own us some big money.


Seems to me that the smart way to deal with wildly overpaid CEOs is to tax that sort of pay heavily, and use the money for education & infrastructure. This harnesses the greed and stupidity for the benefit of society.


THe article is also contradictory. It first states that shareholders are well placed and empowered to decide how much a CEO should earn. If they are so "spot on" and clever, then why does the author feel that the Government should issue legislation that focuses bonusses on the long-term? Folowing the authors initial logic, these astute, assertive and intelligent shareholders would understand that themselves very well! Of course that is not the case. The relationship shareholders - CEO is the classical Principle - Agent problem writ large. The insiders have an information- and organisation advantage. This has become more so since shareholdership has been democratized. In the bad old 19th century one "kapitalist" exploited N "workers". Now one so called "worker" (the CEO) exploits N "kapitalists" (pension fund members, mutual fund participants etc.).


This article is pretty superficial:
1) Globalisation doesn't preclude market failure. Maybe the market failure occurs globally or just elsewhere, eg in the USA
2) For UK executives there may be something like a global labour market, but certainly not for the Dutch, Germans, French etc. Who cares globally about French ENArgues, or German Dr. Dr. Prof.?
3) Modern shareholders are often pension funds, index trackers etc. They may be passive and non-discerning
4) To grow to the top of a large firm you most likely need the skills of a politician rather than those of a leader or entrepreneur. Are these skills indeed so rare and are they so useful? In certain situations a powerful / clever / inspiring CEO can make a difference, but most are just replaceable caretakers, trying not to rock the boat and kicking the can down the street
5) There is market failure. The Executive Compensation advisors have worked hand-in-glove with Executives to drive up the price. So part of this "global labour market" is actually a global cartel, administrated by the Executive Compensation advisory firms for a hefty fee.

blue asgard

The reason why people at the top draw excessive salaries is because globalisation ratchets up the levels and the expectations. The argument goes that if a given country deprives its 'top people' then there will soon be not enough talent to go round. They will simply migrate to more bonus-friendly territory.

Well, maybe. I'm sure no executive would begrudge his egregious salary or bonuses if he had to wait for them for a while. How long is up to him and his ilk. Basically excessive levels of both pay and bonuses can be quantified (and it doesn't much matter if the state gets this wrong and gouges too much) and taxed at punitive rates subject to 100% tax relief if the money is instead sent to investment instruments charged with investing in small businesses and start-ups (there can be tax regimes for these, too to make sure they do what they are supposed to). The investor gets his money back plus dividends after certain conditions are met (e.g. minimum time periods or amounts of reduced buying power) and then those returns are taxed normally. The executive gets his pay in the end, just no instant gratification, and the economy - the real economy - benefits mean-time. If it all goes into his pocket without doing any work it might wind up in safe investments but is highly unlikely to go refreshing those parts of the economy from which our long-term wealth will be mostly coming from.

So those big-bucks flashers will be doing us all a favour. No need to gripe at high pay any more.

Meantime shareholders, those at least who actually hang on to their shares long enough to care, might like to ask whether they are losing out on their dividend because of those big bonuses and if aggrieved, test it out in court. The law could be changed to make this easier, for e.g allowing class actions of aggrieved shareholders for such things as loss of share value or failure to maximise shareholders returns. And where these offences are not clear in law they should be so clarified.


Suppose legal limit is imposed throughout EC countries (including, mind you, UK) on CEO pay at, say twice the salaries of the each country’s president or prime minister, but not in USA , the homeland of Chicago School and 1% vs 99%.( No back-door incentives such as stock option.)
“Talented” CEO aspirants will flock in droves to USA, but there will only be so many Fortune class corporations with generous or lazy boards of directors. Competition for CEO posts will be severe, thereby dragging down the market price of CEOs there.
Many times more CEO aspirants with equal level of “talent”, who are not fortunate enough to land the job, will come back and be eager to work on EC pay. They will work even harder to prove themselves, with their eyes on “promotion” to USA ,so long as US pays does not come down to EC level.

Manish Godha

Globalization and ensuing competition for talent have their part to play, but the distortion is far greater. There are stark imbalances of power and accountability. People at the top at large corporations can very easily make decisions (and justify them with injudicious use of "globalization" and "dearth of talent") which can benefit them handsomely. These decisions are routinely and conveniently tolerated (or hidden) as they may be much smaller than the size of the corporation affairs. This is a breeding ground for corruption -- in the sense that one can directly benefit himself (or herself) from resources entrusted to him (or her) for benefit of many (relatively powerless) others.

Truffle with ruffles

Read your history books friends. Throughout history, various groups sought to retain a disproportionate share of "rewards' for themselves. Kings justified it as a divine right, the nobility for their great deeds, the clergy in God's name, etc. The tribe of CEOs call on the mantras of globalization, scarcity and skill to justify their dues.

Can these dues be logically or mathematically justified? I think not, but CEOs in corporate jets are an indelible feature of our times as kings and nobles on their richly-caparisoned steeds were in times past.


The article misses the fundamental point: that excessive pay levels for top executives globally have resulted from a flaw in the joint stock company model. Companies are so remote from real, effective shareholder democracy that boards are composed largely of the same echelon of person (former CEOs & CFOs of other companies, and senior lawyers or accountants). The benefit is that these people are familiar with the task of top management, company strategy, finance and risk. However, the cost is that it is relatively easy incrementally to persuade these people that the CEO community is worth more, as this indirectly reflects on the worth of board members as a community. The gamekeepers are closer to the poaching community than they are to business owners. Institutional shareholders represent a further distancing from shareholder democracy. They, by and large, don't rock the boat too much and are also excessively remunerated. In this way, the hegemony of the 1% is cemented in place, and the franchise value of brands is distributed as largesse to those who don't own the brands and who didn't create them. Lest you think I'm stooge for the occupy movement, I'm a former stockbroker, and paid up member of the 1% myself.


Readying through these posts a few truths seem to emerge.

There is a real difference between high levels of compensation for a true entrepreneur and the executive of an existing business.

Determining if the compensation of an executive is "excessive" is fact specific and must be made with a long view. Obviously, where compensation is excessive, there is a lower cost alternative.

"Real" shareholder control CAN avoid excessive executive compensation. Having been involved with many different companies over the years, I have seen a clear difference between the level of compensation in companies where ownership is widely dispersed (e.g. public company) and those that are closely held: the latter having much more shareholder control over compensaiton. I have experienced very large closely held companies where the executives have generated long term value (the real indicator of an executive's skill) and their compensation packages were a mere fraction of some of the CEOs that destroyed long term value.


Possibly the silliest, most poorly reasoned article I have read. Such drivel from educated people suggests a vested interest somewhere.


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