Emile,

Is there not a difficult practical issue here? There has been an outcry about the huge pay packet of Caros Ghosn at the head of Renault and its Japanese arm, Nissan. They calculate how many years it would take a production line worker to own what Ghosn gets in a day. How can he possibly be “worth” it?

The trouble is, he is extraordinarily talented and has lifted a very ordinary, previously nationalised, company, with none of the originality of Citroën (and its traction avant or the hydraulic suspension DS) to the status of being one of the world’s top car makers – despite the business-hostile attitude of French society, labour laws and tax system. Does he “deserve” over €16,000,000? Maybe not. Does he “need” that much? Definitely not.

But how much is a rough, crumpled up sketch by Picasso “worth”? How much is a “rare, collector’s” Rolex “Worth”? If some idiot says €500,000 and sevral other idiots came close to that in the auction, then it is worth it. The rusted hulk of an abandoned Jaguar E-type with clapped-out big ends is probably worth as much too.

If Carlos Ghosn were ousted from Renault, or the French government passed a law which said that €1,000,000 is enough for anyone (which it surely is) then Ghosn would simply go elsewhere and exercise his multilingual business skills elsewhere. Who else could run two businesses in two continents highly successfully and simultaneously while learning fluent Japanese? He can name his price. His market value is enormous. The only way to control this is to control the global market for talent. This means not only a centrally planned economy (such as worked with very mitigated success in the USSR, Cuba and Venezuela, not to mention Viêtnam) on a national scale but on a global scale.

A free market economy, which permits and encourages enterprise and personal gain, comes at a price. I have never been sufficiently single-minded to pay that price myself in the pursuit of wealth (although highly motivated to be comfortable) but I am solidly in favour of permitting others to do so. I did not earn their sort of money but I still benefit indirectly from their relentless dedication to power and wealth. This dedication does not make them nice people, but the spin-off is worth it, and stifling it would surely take us back to the old Russian joke about the communists: “We pretend to work, and they pretend to pay us!”. Or the equally old American joke “If you pay peanuts, you get monkeys”.

There is a better form of control, but that is also a market one. If the shareholders say they do not want to invest in a company that pays its bosses excessively when they are not worth it in terms of market rates or, worse, are demonstrably failing, and vote down their pay awards, then the system will work. This means the big institutional shareholders, obviously. There are signs of this and they should be encouraged. Better use the money to reward shareholders with dividends, keep the share price up, and thus avoid hostile takeovers that exploit shareholder anger and willingness to sell up. Or pay the price and get take over and sacked.

Yours,

Nigel

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Dear Nigel,

I’m not sure that we are talking about the same thing here. What the production-line worker is paid is contractually determined when he is engaged. It is therefore known in advance what his terms are, including his bonus determination, his hours, his holidays, his annual review dates, and so on. This is all market-driven of course, which means that the production-line worker, like his boss, is able to transfer his employment to another enterprise if warranted by differential pay and conditions.

The market is not “open”

The executive bosses at the centre of the controversy we are discussing are also trading their skills in a “market” of sorts, but in this case the rewards (notably bonuses and annual increments) are far from openly predetermined since they are “negotiated”, covertly, often well after the year-end, with a Remuneration Committee consisting of similarly remunerated executives whose rewards may well depend in turn on how favourably they have treated their peers. (I know because I have been there and witnessed the back-scratching in action!)

Misallocation of resources

Perhaps the most important factor is the opportunity cost of paying out gargantuan sums to individuals. Applying that money instead towards, say, the cost of research and development in advanced product technology would be of far greater value to the shareholders, the production-line workers and, indeed, the community of workers who would love to work there.

I am not in favour of the worthless gimmick of having workers’ representatives on the Board (nor, it now seems, is Theresa May); and having binding annual shareholder votes on executive pay is little more than a membership entitlement anyway, BUT (i) like the pay and conditions of the assembly-line worker, they should be transparent and known in advance, with targeted achievement criteria publicised for all to see; and (ii) the scandal of manipulated accounting data being used for calculating incremental EPS (on which bonuses are based) amounts to criminal deception and should be banned by the Department of Business, Innovation & Skills. The alternative “worth” metrics to which you refer (Picasso drawing, E-type chassis, etc) are in my view irrelevant to this debate.

Economic causes, as ever

Finally, it is worth remembering:
(1) we are talking mainly of the Fred Goodwins & Bob Diamonds, and not the James Dysons, of this world. The latter’s remuneration package is not, and is never likely to be, the subject of scandalously amoral values, whereas the unmerited millions paid to Diamond and his banking ilk is a national disgrace;
(2) That, as ever, there is an economic causal level. Lying behind the asset price bubble, of which these astronomic remuneration packages are so symptomatic (and incestuously supportive), is the banks’ criminality in being willingly complicit in the central bank’s strategy – which is to inflate the money supply to steal the savings of the general populace through price inflation. The mountain of fiat money has to go somewhere – so why not executive bonuses? The prices of houses, luxury cars, jewellery, furs and suchlike rise in step NOT with production costs, but with the ability of fat cats to pay these stupid prices. And so the spiral just keeps spiralling.

Until our sovereign debt, like Italy’s right now, having absorbed all the fiat money, is recognised to be beyond redemption at the same purchasing power. Another banking armageddon in the making.

Many thanks for the blogworthy stimulation, and I look forward to seeing you next season.

Emile
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Emile Woolf
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