How excessive CEO pay helped fuel the rise of Donald Trump, Brexit and an anti-capitalist movement

  • Efforts to curb excessive CEO pay have failed, even as politicised grievances over inequality have gained momentum
  • Superstar CEO packages have inflated since the late 1990s, while average US household incomes have stagnated
PUBLISHED : Sunday, 30 December, 2018, 6:05pm
UPDATED : Monday, 31 December, 2018, 12:06am

Plato apparently insisted 2,000 years ago that no one in the ancient Greek economy should earn more than five times the average working person. George Orwell argued in 1941 that there was “no reason that 10 to one should not be the maximum normal variation”. Jump forward to the early 1970s and management guru Peter Drucker said that 20 to one from top to average was the right range between average workers and the CEO.

I wonder what view they would take of today’s average American CEO, earning US$13.1 million a year, almost 350 times the average US worker’s wage? Or of the UK, where average chief executive pay amounts to around £4.5 million (US$5.71 million)- 129 times the median employee?

Our superstar top executives would of course claim that the difference is well justified, and that their complex bundles of salary, bonus, share options and the like are hard-earned and well benchmarked against superior company performance.

But a growing body of research says their super-stuffed packages are impossible to justify. Is it really plausible that when that average US CEO walks into the office tomorrow, the first day of 2019, he or she deserves to earn in that single day the same sum that his average staff take the whole of 2019 to earn?

At what point, in simple practical terms, does it become impossible to spend such colossal pay packages? At what point does pay become more a matter of status than need? To what extent is it true that, however much an executive is paid, it will never be enough unless others are paid less?

Research shows that these giddy executive packages bear little relation to superior company performance either in profits or in share value, and that where CEOs have presided over strong company growth and profitability, they have more often than not been accidental heroes, riding the wave of a buoyant economy or market trend.

As Deborah Hargreaves, founder and head of the UK’s High Pay Centre asks in her new book Are Chief Executives overpaid?, what can justify Evan Siegel, founder of Snapchat, pocketing US$638 million even though the company has yet to make money? How can Timothy Sloan, head of Wells Fargo in the US, deserve a 17 per cent pay increase to US$12.8 million while the bank is in the middle of a massive accounting scandal?

Research also shows that the giant increases in executive pay over the past two decades have played a large part in putting trust in businesses – trust in capitalism itself – in jeopardy.

As Deborah Hargreaves notes: “It is anger over pay, inequality and the current economic set up that is currently feeding anti-capitalist sentiment among the wider public. It is important that people feel there is some sense of fairness in the division of rewards throughout the economy.Greedy executives can be said to be wrecking capitalism for the rest of us.”

She argues that the surge in superstar CEO packages since the late 1990s, where average household incomes have stagnated (for example, around US$60,000 a year since 2000 in the US), has contributed significantly to the perverse political ascent of the likes of US President Donald Trump, of the Brexit vote in the UK, and the recent “gilet jaune” tax protest movement in France.

Since the complex and massive executive packages correlate so poorly with company performance, many argue that the past decades’ contorted efforts to link CEO pay to company performance has been a massive mistake. Take former CEO Steve Clifford, author of The CEO Pay Machine and a member of several corporate pay committees: “All pay for performance systems cause more harm than good. They generate perverse incentives, undeserved and absurdly high bonuses, and damage the companies that use them.”

In more measured tones, Peter Montagnon, former Financial Times journalist and now associate director of the Institute of Business Ethics, insists, “greater clarity and simplification would remove much of the obscurity around the operation of executive pay, which is the cause of much public distrust.”

For me – apart from the simple sense of plain old envy – I have always felt a deep distrust that hired gun CEOs can be parachuted into a company and make a true difference. Intuitively, I feel a good CEO needs to have deep roots in a company, to have its blood in his or her veins, and to feel a sense of long-term stewardship if he or she is really going to make a difference.

I feel that a CEO needs to share credit for strong company performance with a large team, and that the team – right down to a production line – should deserve reward for strong growth and competitive success.

I feel that if bonuses are going to be thrown around, then they should first be rooted firmly in company profits, and should be distributed across the entire workforce, as a percentage of salary. If the CEO gets a 20 per cent bonus, then so too should the staff. Such arrangements not only link the entire workforce in a sense of common endeavour but – as Deborah Hargreaves notes – creates a feeling that “we are all in this together”.

While there is growing agreement that executive pay packages have run out of control, and that they sit at the heart of increasingly politicised grievances over inequality, all efforts so far to curb excess seem to have failed. Higher taxes and more regulation have been tried and seem always to fail. Perhaps workers on boards might have positive results.

Perhaps in part the poverty of progress is because responsibility for oversight sits with shareholders who disproportionately care about one measure of performance – share price and dividend payouts.

More directly, responsibility sits with pay committees. But how keenly concerned can such committee members be when the average annual fee paid in the UK to such members in 2015 was £441,383?

Deborah Hargreaves does a good job of elaborating the gravity of the problem. I wish I could feel confident she is even halfway to elaborating a solution.

David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view