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Seven deadly sins of executive pay
Illustration: John Shakespeare.
Excessive executive remuneration is widely viewed as a symptom of greed, one of the seven deadly sins. This view ignores the complexity and subtlety of the issue.
For some, excessive pay contravenes ideas of equality.
Nicholas Moore, the chief executive of Macquarie Bank (nicknamed "Moore & Moore" by the press) should be paid the same as a nurse, who should be paid the same as a doctor.
This misunderstands the concept of equality. French novelist Anatole France observed: "The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread."
It challenges concepts of motivating achievement through reward. An objective assessment of different contributions in disparate areas of expertise is also likely to prove difficult.
Concern about excessive pay also focuses on allocation; who gets what. Mark Twain once admitted: "I am opposed to millionaires, but it would be dangerous to offer me the position."
For others, the issue is proportionality; a chief executive's reward is disproportionate to his or her contribution.
It is certainly true tight circles of directors and consultants determine senior executive salaries. "Benchmarking" exercises merely reinforce the norm, with packages being justified as "needing to buy the best talent" or "meeting the demands of a competitive market". Results are also easily manipulated to meet specified performance hurdles for bonuses. There are recent severance payments which highlight that failure is better rewarded than success.
John Kenneth Galbraith identified this pattern long ago: "The salary of the chief executive of the large corporation is not a market award for achievement. It is frequently in the nature of a warm personal gesture by the individual to himself."
But who is responsible for this? Many people are now shareholders, directly or through superannuation schemes. But such critics ironically acquiesce in the award of generous senior executive packages. They either actively vote in favour of these contracts, or fail to challenge the arrangements, as is their right.
There may be a double standard. Critics were willing to hand executives generous pay packets so those talented managers would make them richer. Many turned a blind eye to excesses when they became richer through higher share prices and dividends.
As critics raise the sin of greed when dealing with excessive remuneration packages, ironically it predisposes those critics to committing the other six deadly sins.
Perhaps critics secretly lust after the same riches that they now censure. Their desire for increased wealth to fuel excess consumption - the sin of gluttony - drives greed.
Critics are guilty of sloth in their laziness. They do not participate in the corporate process as shareholders to set the executive salaries.
Critics may be guilty also of the sin of wrath as they now indulge their righteous anger. They commit the sin of envy as their stand may be merely resentment at those in the world who have done better.
Finally, critics are almost certainly guilty of pride. Those eager to speak out against excessive salaries are conscious of their superiority in making their principled stand against greed.
In truth, critics are looking for scapegoats and simple answers to the losses suffered as a result of the global financial crisis. This is evident in the return of large pay days as share prices have rebounded. John Stuart Mill cautioned: "Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works."
Excessive executive remuneration is not a simple matter of greed but symptomatic of deeply flawed economic and social systems. In their classic 1932 book The Modern Corporation and Private Property, Adolf Berle and Gardiner Means argued that companies were akin to feudal kingdoms run by princes of industry consistent with their own interests.
Half a century later, directors and managers (with modest shareholdings) in conjunction with, for the most part, benign investment managers, still run enterprises in a manner not always consistent with the interest of absentee shareholders.
John Maynard Keynes was aware of this: "Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone."
All systems are flawed. The real issue is their effectiveness. Unfortunately, as Keynes wrote: "The decadent international but individualistic capitalism in the hands of which we found ourselves … is not a success. It is not intelligent. It is not beautiful. It is not just. It is not virtuous. And it doesn't deliver the goods."
Genuine reform of executive remuneration requires understanding of the true problems and reforming the economic system rather than merely treating one of the symptoms.
Satyajit Das is the author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives. This article is based on a contribution to the Adelaide Festival of Ideas.
Seven deadly sins of executive pay
- Satyajit Das
- July 17, 2009
Illustration: John Shakespeare. For some, excessive pay contravenes ideas of equality.
Nicholas Moore, the chief executive of Macquarie Bank (nicknamed "Moore & Moore" by the press) should be paid the same as a nurse, who should be paid the same as a doctor.
This misunderstands the concept of equality. French novelist Anatole France observed: "The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread."
It challenges concepts of motivating achievement through reward. An objective assessment of different contributions in disparate areas of expertise is also likely to prove difficult.
Concern about excessive pay also focuses on allocation; who gets what. Mark Twain once admitted: "I am opposed to millionaires, but it would be dangerous to offer me the position."
For others, the issue is proportionality; a chief executive's reward is disproportionate to his or her contribution.
It is certainly true tight circles of directors and consultants determine senior executive salaries. "Benchmarking" exercises merely reinforce the norm, with packages being justified as "needing to buy the best talent" or "meeting the demands of a competitive market". Results are also easily manipulated to meet specified performance hurdles for bonuses. There are recent severance payments which highlight that failure is better rewarded than success.
John Kenneth Galbraith identified this pattern long ago: "The salary of the chief executive of the large corporation is not a market award for achievement. It is frequently in the nature of a warm personal gesture by the individual to himself."
But who is responsible for this? Many people are now shareholders, directly or through superannuation schemes. But such critics ironically acquiesce in the award of generous senior executive packages. They either actively vote in favour of these contracts, or fail to challenge the arrangements, as is their right.
There may be a double standard. Critics were willing to hand executives generous pay packets so those talented managers would make them richer. Many turned a blind eye to excesses when they became richer through higher share prices and dividends.
As critics raise the sin of greed when dealing with excessive remuneration packages, ironically it predisposes those critics to committing the other six deadly sins.
Perhaps critics secretly lust after the same riches that they now censure. Their desire for increased wealth to fuel excess consumption - the sin of gluttony - drives greed.
Critics are guilty of sloth in their laziness. They do not participate in the corporate process as shareholders to set the executive salaries.
Critics may be guilty also of the sin of wrath as they now indulge their righteous anger. They commit the sin of envy as their stand may be merely resentment at those in the world who have done better.
Finally, critics are almost certainly guilty of pride. Those eager to speak out against excessive salaries are conscious of their superiority in making their principled stand against greed.
In truth, critics are looking for scapegoats and simple answers to the losses suffered as a result of the global financial crisis. This is evident in the return of large pay days as share prices have rebounded. John Stuart Mill cautioned: "Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works."
Excessive executive remuneration is not a simple matter of greed but symptomatic of deeply flawed economic and social systems. In their classic 1932 book The Modern Corporation and Private Property, Adolf Berle and Gardiner Means argued that companies were akin to feudal kingdoms run by princes of industry consistent with their own interests.
Half a century later, directors and managers (with modest shareholdings) in conjunction with, for the most part, benign investment managers, still run enterprises in a manner not always consistent with the interest of absentee shareholders.
John Maynard Keynes was aware of this: "Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone."
All systems are flawed. The real issue is their effectiveness. Unfortunately, as Keynes wrote: "The decadent international but individualistic capitalism in the hands of which we found ourselves … is not a success. It is not intelligent. It is not beautiful. It is not just. It is not virtuous. And it doesn't deliver the goods."
Genuine reform of executive remuneration requires understanding of the true problems and reforming the economic system rather than merely treating one of the symptoms.
Satyajit Das is the author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives. This article is based on a contribution to the Adelaide Festival of Ideas.
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