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The cost of well-paid chief executives

Evan Davis | 15:17 UK time, Thursday, 17 July 2008

It's the second day of strike action by local authority workers. I'm not sure how their pay dispute will end or whether we are in for a summer of discontent.

But it is already clear that as economic times get tough, the inevitable battles over who takes what pain, heat up.

Now I've had a couple of recent experiences interviewing union leaders about this on the Today programme (most recently, Dave Prentis of Unison yesterday).

I put what I think of as the obvious points about strikes: "we have to avoid wage price spirals"; "if the money isn't there for a pay rise, it isn't there"; "there's no entitlement to an inflation-matching pay rise" etc.

But on each occasion, the answer comes back that chief executives have not shown the same level of restraint, so why should workers?

The issue has come up in tax debates too - the answer to "where will the money come from?" is some variant of "from extra taxes on the chief executives who have seen their pay rise so many times faster than everyone else's".

It doesn't make for a very interesting conversation to accept the point without challenge.
But if you want to offer arguments against, they have to be credible. So how do you do it? Why should the low paid make a sacrifice that the rich don't bear?

As far as I can see, the potential strategies to adopt in that kind of interview are:

a) to accept that the poor should be paid more, and to agree that something should be done about chief executive pay

b) to stop using arguments that appeal to a need for restraint at a difficult time for the nation, and to talk about other reasons for pay restraint

c) to say that the rest of us need to be restrained even if our employers are not.

I think in the context of an interview, the third provides the most realistic basis for an interesting argument with a union leader.

Yesterday, I said to Dave Prentis that if we all tried to have pay rise like chief executives, the country would obviously go bankrupt very fast.

I was right to make that point - we can't all benchmark ourselves against the group getting the biggest pay rise.

But it never sounds very convincing.

It would be nice if chief executives took that into account when setting their pay.

And well done to Mervyn King for foregoing his bonus... if he hadn't, no interesting interview on pay would have ever been possible.

Comments

  • Comment number 1.

    I thought your questioning was perceptive although it needed longer to get under the superficial responses.

    Much of the argument is concerned with perceived fairness. A few flat-rate increases would help, since the usual percentage rises will always benefit the better paid and widen pay differentials.

    I didn't really understand your point about where the money would come from. Surely there is no absolute public service pay cake to divide up? Again, there'll be perceived unfairness in a government which can pour money into the Olympics, identity cards and obviously doomed IT schemes but can't fund its public servants' pay.

    Just an aside - can we stop talking about 'the' old, 'the' young, 'the' sick and so on. We'll probably all fall into these categories at some time. We may even be members of 'the' rich and 'the' poor at different times in our lives.

  • Comment number 2.

    The argument has traditionally been if you want chief executives out of the top drawer, you have to pay top dollar. This does not, however, take into account the law of supply and demand. There is competition for senior positions and doubtless candidates capable of filling them.

    A good CEO should be able to demonstrate an ability to empathise with the workforce and a sensitivity to stakeholder and public opinion. Accepting pay settlements which they are unable to offer their staff and disregarding public opinion in doing so is not a mark of good leadership. One may be forgiven for asking if these people really are as good as we are led to believe.

  • Comment number 3.

    The problem that you interviewers never point out is the ratio of CEOs to the workers. Ten thousand workers at £20,000 pa at 1% increase is £2 million. One CEO at £200,000 at 1% increase is £1000. And after tax the CEO increase is less too.

    Now I am not justifying CEO pay rises. They too should bear the market forces. The problem is the Governing bodies making the decisions are often too close to the CEO.

  • Comment number 4.

    evan - it's not for you to answer the union's concerns. your job is to find out why the unions are striking at the moment. the difficult bit - down right impossible i would imagine - is to then find one of these chief execs with an above inflation pay rise and put the union's reasons to them. good luck

  • Comment number 5.

    Do you recall the fat-cat who ran British Gas who proposed that his huge salary matched the responsibilities he had. Clearly he never thought that the British Gas Engineer had the huge responsibilty of ensuring the gas appliance he had just fixed would not explode and burn down the house, injure or even kill the customer. That's responsibilty.

    Remember when Thatcher proposed that employees could have pay rises only when they produced more and the company made more profit. While the employees did their bit and produced more - only the shareholders saw the profit.

    I have often thought that the employees should be the ones who chose their bosses. That way they could select who they thought would make the most money for the company and which wouuld consequently increase their size of their wage packets.

  • Comment number 6.

    CEOs have leverage over shareholders that unions can only dream of. They pay themselves a lot because they can. They are, in a sense, the triumph of labour over capital.

    Pay levels are not determined by moral considerations but by bargaining power. You might tell Dave Prentice that executives are more powerful than unions and that he should get over it.

  • Comment number 7.

    In an age where Mammon rules these is simply no mechanism for restraint by any party. The market is left to decide with no holds barred.

    Perhaps you do not like this situation and you seek the certainties of the pulpit, be it of any of the peoples of The Book, or any other religion. (I would suggest you ash a Methodist minister for an answer.) Essentially the question that you challenge yourself with is a moral and intellectual question.

    But we are British and vociferously ant-intellectual so you will have to live with the dichotomy between your desire for a moral rule and the free-market. Alternatively you could become French or German where different cultural influences are at play and intellectuals are not hung out to dry!

    Your question is really one for 'Thought for the Day'.

  • Comment number 8.

    It was disingenous of the union leaders to interject about the pay of chief executives. This is not what was being discussed. Why haven't they raised the issue of the large salaries being paid to local authority chief executives before, or even agitated for a strike about the same? Of course they haven't as that would prevent them from dragging this particular red herring in from the garden when it suits them.

    In short, public sector pay is a scandal.

    The management ensure that they receive more than adequate pay for a largely stress free life whilst at the same time paying scant regard for the rather pitiful reward received by the hewers of wood and the drawers of water.

    This suits the interests of both the management and the unions as they can then keep coming back to the taxpayer and demanding they receive more.

    So why does my Council Tax keep going up by far more than inflation whilst the services I receive slowly decline?

    The answer to that is poor productivity. The reason for that is indifferent management and an unmotivated workforce.

  • Comment number 9.

    In my opinion, all arguments based on value judgments about different jobs are doomed to irresolvable bickering.

    The only possible, and arguably, the only fair way to judge one person's value is by allowing two people to come to a mutual agreement about how much one wants to pay the other for his work; collectively, these agreements establish a market rate.

    Anything else will get bogged down in disputes about whether a doctor is worth more than a dentist (depends whether your tooth or your tummy hurts more at the time), or an engineer worth more than a civil servant, and so-on. I've lost count of the number of times I've heard people comparing how many years education it takes to do one or the other, or how many hours they work, or how many miles are walked, or whatever.

    In the case of a private company, the managers make the offer on behalf of the shareholders; in the public sector, on behalf of taxpayers. To pay any more than the market rate due to pressure from a union represents a transfer of money from the taxpayer or shareholders to a special interest group exercising a monopoly power.

    In any other economic circumstance, we attempt (or should attempt) to nullify monopoly power. Why not in this case?

  • Comment number 10.

    As suggested by threnodio, I wonder if a CEO whose apparent only reward is a massive salary, really does have the right mentality for the job. I also wonder if we should stop talking in percentages when discussing salary increases and start talking in actuals. A 3.8% increase for a highly paid CEO might exceed the total salary of one of the lowest paid workers who funds the CEO's salary increase by carrying out the work which actually generates income. Sorry if this doesn't help with interviewing strategies.

  • Comment number 11.

    I agree entirely with Threnodio.

    The essence of good leadership is demonstrating the behaviours you expect of others. So, if you expect restraint in pay demands you have to demonstrate it.

    Perhaps if we looked for leaders who showed real leadership then we might get a different calibre of CEO altogether - those that put leadership ahead of their personal package.

    That's not to say they should be underpaid - its a demanding job and deserving of top notch pay. But we also need those who actually lead from the front rather than delivering "do as I say not as I do" type of leadership. That is NOT leadership.

    It's no use demanding others take the pain if you can't take it yourself.

  • Comment number 12.

    I certainly don’t think c) is a reasonable position to take and a) is what should be happening, but won’t because there is no independent mechanism in place to enforce a fair distribution of company profits from top to bottom and so the people with the control of the purse-strings (at the top, of course) will always dictate who gets what and nowadays, as we have seen time and time again from top level executives, that will be with total disregard for anyone livelihood, but their own.

    With regard to interviewing technique itself, I don’t think you yourself should be challenging the union guy’s position. That is the “mistaken” strategy most journos take in order to generate some color and interest in their own activities.

    The adversarial position, the one of attack, always only stifles the opportunity for interesting discussion, because it puts the interviewee on the defensive and does not positively encourage him to open up and explain his position or the principals behind his or his members’ strategy.

    I think initially the interviewee should be asked to put forward where he thinks his particular strategy is taking his members. Given the current situation with finances, economic prospects etc etc, ask what outcome (presumably positive) does he anticipate, if his claims and “demands” are successfully met, for his members, the authority (because these actions of his will have an impact on it too) and their ongoing collective futures?

    Imo, these are the issues for him to be addressing and there’s no point getting into the executive pay aspects of the argument because there will never be an executive around to make their case or argue their counter-position, so it’s a pointless exercise.

    We all already know what the union leader’s opinion will be regarding the executive wages issue, but it’s irrelevant for the purposes of interviewing him, his point of view and his aims.

  • Comment number 13.

    There's another, better option:

    d) Say that both workers and executives need to exercise pay restraint.

    Yes, something needs to be done about executive pay, but that doesn't change the fact that inflationary pay rises across the board will wreck the economy.

    If the union reps aren't countering the arguments for pay restraint, and are instead resting their pay claims on executives' lack of restraint, then perhaps instead of striking for pay rises for themselves they should be striking for pay cuts for their bosses. That may be the only way to get sustainable equality.

  • Comment number 14.

    So we should just eat cake then?

  • Comment number 15.

    I don't object to CEO's who turn round businesses, or for healthy businesses achieve upper quartile growth compared with others in their sector, getting well rewarded because they are demonstrably top of their particular field They are generating profits and cash flows which will enable their business both to invest in the future and also, as well run businesses invariably do, reward their staff well in recognition of their contribution.

    What does get my blood boiling is when the same argument is used to justify large pay rises and levels of pay generally for Senior public servants, including executives of the BBC. These people are required to do no more than ensure that expenditure is wisely apportioned and kept under control. Their revenue line is tax funded.

    They are not required to deliver on the most difficult aspect of a CEO's job, and that is to generate revenues, find and keep customers, preserve and grow margins, monitor and manage competitive threats. And, of course, CEO's in the private sector will also have to ensure that expenditure is wisely apportioned and kept under control.

    Similarly, my blood boils when CEO's of poorly performing private organisations receive above inflation rises.

    The problem is that too many with the title CEO, regardless of the business challenges he faces in reality, or how he performs generally, expects his earnings to rise well ahead of inflation.

    I do not see how this is commercially or morally justifiable.

  • Comment number 16.

    Hi,
    It's all about greed and envy - the executives are greedy and the ordinary worker envious. That's why income tax is such a good thing it bears down on greed and envy. First thing the labour government should have done was ignore the lesson from the 1992 election and changed the burdon of taxation from VAT to income tax.
    My sympathies are with the ordinary worker. I think excutives have a robber baron mind set and some of them because they are overly encouraged by enormous incentives take huge risks and seriously damage their companies -look at Northern Rock. Even the governor of the bank of England thinks it's gone too far. When taking about their own pay I have never heard an executive say "one man's pay rise is another man's price increase".

  • Comment number 17.

    Going off at a slight tangent; I'm always entertained by the notion that anyone should get an automatic pay rise at any rate, be it above or below inflation.
    I've worked in both the public and private sectors and have run several small businesses in the last 20 years. Only in the Civil Service did I get an automatix x% pay rise for (so far as I could see) simply being a year older. In the private sector, both as an employee and an employer, pay rises only come when profits rise.
    Never mind this regular wrangle about matching board-level salary increases to workers' salary increases to the notional rate of inflation... why don't we try to address this notion that everyone deserves a pay rise every year, no matter what?

  • Comment number 18.

    How much private sector CEOs get paid is a matter for shareholders. It's their money, and they can spend it how they want. But state sector workers (and BBC employees, incidentally) are paid with MY money, and it's very much my business. So yes, there are lots of badly paid people in the state sector, but there are far too many of them. And the salaries of state sector senior management are a national disgrace.
    To paraphrase Galbraith, "the salary of the chief executive of a large council is not an award for achievement. It is frequently in the nature of a warm personal gesture by the individual to himself".
    Ditto the BBC.

  • Comment number 19.

    Evan,

    It's a little thing called hypocracy Evan. Your preference for the third question is cowardly. You're expecting those of us (in the majority) to accept a moral argument for pay restraint, while refusing to accept that if it is a good moral argument (that large pay rises at this time are detrimental to the the general welfare of all) it should be applicable to all (including CEOs etc.) Nobody likes being told to 'do as I say not do as I do' especially what an appeal is being made to the greater good of all. Being an economist Evan, you know that there may be a moral reason for limiting pay, but, given our embrace of the free marke and the sovereign individual, certainly no economic reason. The market decides isn't that the mantra from up on high?

  • Comment number 20.

    Evan,

    I think your three options overlook the most important issue of all.

    You said -

    > if we all tried to have pay rise like
    > chief executives, the country would
    > obviously go bankrupt very fast.

    This means one of two things:

    1. Chief executives are adding vastly more value to the economy than most individuals. (This observation is true of Paul McCartney, for example, although obviously he isn't any kind of executive.)

    2. Chief executives are giving themselves a vastly greater share of the economy than they contribute. Strictly speaking, this means they are stealing from the real wealth creators.

    When you listed your three options you omitted to mention challenging chief executives to demonstrate that they are worth their money. (With union leaders you could challenge them to show that the relevant executive is _not_ worth the money.) This goes directly to the heart of the issue. A hospital manager who halves costs while improving clinical outcomes is worth real money. A hospital manager who presides over dirty wards causing an epidemic of MRSA should be paid nothing (and probably jailed).

    In my experience this question - what do senior executives actually contribute in return for their money - is never addressed. Typically, apologists for executive pay just airily announce "top performance requires top pay" and then no one ever bothers to examine what performance we are actually getting in return for what is after all _our_ money.

  • Comment number 21.

    It seems to me that Chief Executives are a bit like MP's. They don't seem to have any qualifications to do the job, other than the fact that their name has appeared on some firm's notepaper as a Consultant in a field which does not have to be at all relevant to the appointment in question. This seems to be all that is required. I'm sure it's not what they know, but who they know which gets them into the job in the first place. Once they've been appointed, it doesn't matter if the whole thing goes belly up, they'll still get their bonuses and will move on to fail in some other company with a big fat pension to boot.

  • Comment number 22.

    I think you may have overlooked the supply and demand issue. In an unrestricted environment this operates quite strongly. If there were any number of people capable of doing the top jobs they would be paid peanuts. You only have to look at sporting stars where there are inevitably not many people that win at world champiionship level or score goals in the premier league. For some reason their pay is not seen to be immoral. If you contol wages you will not get the best people in the top jobs or teh best sporting results so ultimately the employees will suffer. Why can people not see this? There clearly is a point where wealth contrasts become unacceptable but at this stage I would much prefer to have the best (on an international scale) running the company I work for that someone not really up to it. Companies can go down hill very quickly. Frankly I don't care what he earns unless it is so much that it actually damages the bussiness beyond the benefits he brings.
    It is a mistery to me why we appear to have got so many bad bank executives. I suspect that bonuses actually become counter productive if they get too big - but that's another subject. I personally do not find them motivating. I accept them but actually I think they are an insult.

  • Comment number 23.

    I'm always intrigued when massively paid bourgeois commentators start wittering on about "we" must do this and "we" must do that. When you volunatarily sign up for thirteen grand per year then we'll talk "we". Plenty of commentators have dismissed the presence of a wage price spiral. So what's it all about, public spending ? The government coughs billions for banks without blinking, billions for Trident, why ? The old conundrum the executive classes have to be incentivised while the proles have to doff their caps and work for nothing. The mystery to me is why is the BBC stuffed with free market fundamentalists like your good self ( except when things go wrong and they scream for state aid )

 

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