Explaining boardroom mega-bucks
The basic pay of most employees is governed by industrial and professional norms, and is relatively stable over time when so-called “inflation” adjustments are factored in. Almost unbelievably, today’s average hourly wage has the same buying power as it did 45 years ago!
By contrast, executive remuneration in the largest companies is determined far more subjectively, for the most part beyond the remit of auditors. The key role belongs to remuneration committees, whose own members’ rewards are equally subject to annual review – suggesting that any claim to objectivity in their deliberations should not be taken too seriously.
Our Prime Minister emphasises the “need to address the economic inequalities that have emerged in recent years”, but her appeal risks superficiality unless given sharper focus: recently released statistics show that the gap in real incomes between richest and poorest households is steadily narrowing.
the gap in real incomes between richest and poorest households is steadily narrowing
Her appeal has far greater relevance to the few (and thus statistically irrelevant) instances of gross abuse at the very top of the corporate tree, where executive pay deals are struck without reference to any rational analysis.
Fatuous references to “market comparators” cut no ice since, in reality, no such market exists. The very idea of a market presupposes an unfettered interplay of competing cases that collectively determine a fairly narrow range of outcomes – the very antithesis of the self-serving executive “club” that now passes for a bargaining forum.
Reliance on shareholders
The chairman of the remuneration committee of Imperial Brands, the tobacco giant, commented recently that a star director, whose basic annual pay is £5.5 million, needs to have her bonus fattened by over £1 million per year to avoid the “distraction of rival offers”! Investors have now defeated this particular proposal – indeed, opponents of this murky feeding-trough need shareholders to express their views in binding polls, using this as a guide: bonuses should be tied to agreed performance measures, while salary rises and pension contributions should be in line with those applied to the workforce in general.
Perhaps auditors should be required to authenticate and report on the measures used in these sensitive calculations. Now that would be a real test of their independence!
Now that would be a real test of their independence!
But no matter how nobly intentioned, the campaigners’ objectives will ultimately fail: the rash of lavishly inflated pay deals do not stem from sudden attacks of irrepressible avarice on the part of City grandees. They follow economic law.
The economic case
The convenient term “money-printing” hides more than it reveals. Central banks do not “print” money. Rather, they empower commercial banks to create an almost unlimited amount of new credit that has much the same short-term effect. Obliging banks, supported by implicit bail-out assurances, do this every time they make a loan: just a few taps on the keyboard, and account balances – along with the money supply – go up, bestowing on its first receivers the power to spend money that no one has ever earned.
This syndrome feeds boardroom pay too: just another bubble, and no amount of righteous campaigning will suppress it. The most “creditworthy” sectors – banks, giant corporations, government departments – are the first receivers of this innovative largesse, creating asset bubbles in houses, businesses, real estate, designer clothing, collectibles, anything that can be priced and traded.
This inflationary wave eventually hits the “last receivers”, the common man and woman, who now face a double-whammy: higher prices and the misery of near-zero interest rates that punish savers relentlessly.
No inflation? Try “shrinkflation”
Disregard statistics that reveal little sign of price inflation. Inflation is just warming up. It is evident on every High Street, although not necessarily on the price tag. Manufacturers facing higher commodity costs mask the impact by novel sleight of hand.
Open your pack of cereal: it now looks half-full; your bar of Toblerone now looks more like a bicycle stand; your 100-bag pack of Tetleys now has only 88 bags; some packs of 20 fags now have only 17; John West tuna, Carlsberg beer, and so on. Prices are the same – but for less!
The mindless policies of those horsemen of the apocalypse, the central bankers, are orchestrating the destruction of purchasing power to a degree not encountered since the Weimar Republic’s hyperinflation of the 1920s.
But the public is not fooled for long!