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Of fat cats and globalization
Friday, 14 November 2008 17:31

If you want to see a trade unionist turn red, purple and then pass out, just mention executive pay.  This is esepcially the case now with the financial crisis which many trade unionists see as the result of executive incompetence.  That is perhaps why the International Labour Organisation analysed trends in executive pay for its recent World of Work Report 2008.

 

In the US, it is estimated that executive managers' pay increased in real terms by some 45 per cent from 2003, compared with 15 per cent for average executives and less than 3 per cent for the average American worker.  Thus, by 2007, the average executive manager in the 15 largest firms earned more than 500 times the average US employee, compared with 300 times in 2003.  Similar developments have occurred in countries like Australia, Germany, Hong Kong, the Netherlands and South Africa.

We have to admit that corporate executives do have tough jobs.  Markets are volatile.  There is greater pressure to seize the opportunities of gloablization and technology.  The fruits of success are now greater, as are the costs of failure. 

Thus, it is not surprising that this has occurred with the use of "performance pay systems" for chief executive managers and directors.  But the evidence shows that there is very little effect of such systems on company performance, and that in some countries there is virtually no relation between performance-pay and company profits.

So how has all this happened?  After all, for some years now, good corporate governance has been the talk of the town in business circles. 

Are executives exploiting a dominant positiion vis-a-vis shareholders?  Yes probably says the ILO which comes up with a number of suggestions of what might be happening.  CEOs exercise considerable influence on the board which sets executive pay.  Share ownership is often dispersed making it difficult for shareholders to oppose executives.  Even large institutional investors may not want to influence executive pay if they have other business interests with the company.  Consulting firms which sometimes assist in determining executive pay also want to keep a cosy relationship with the executive board.  Share-based compensation is often inefficient because it is linked to overall corporate performance, not individual executive performance.

Let the good times roll has been the corporate slogan of the past decade or more.  And so while we have all the good principles of corporate governance, its practice has become sloppy.  Many corporate boards are no more than old men's clubs for retired executives, politicians and other personalities.  They enjoy the occasional meetings to see their friends and collect a nice fat pay check.  Many are even loath to question CEOs, and have become their toadies.

So executive pay is clearly one thing we have to clean up as design a new world for after the crisis.

References:

World of Work Report 2008, International Labour Organisation, International Institute for Labour Studies. 

Executive compensation: Trends and policy issues.  By Franz Christian Ebert, Raymond Torres, Konstantinos Papadakis.  International Institute for Labour Studies.  Geneva. 


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