Top Dogs and Fat Cats: The Debate on High Pay

Abstract

In contrast to the recent past, there is now widespread concern about the apparent excesses of some pay structures in corporate businesses. Top pay has risen much faster than average levels of pay in the last twenty years. This is in part the consequence of globalisation and developments in communications technology, but it may also be a result of rigged markets and crony capitalism. It is asserted that shareholders do not have enough influence on setting executive pay, which is determined by remuneration committees and consultants with a vested interest in boosting top pay. It is important to understand how pay data are produced and used an look at changes in wealth (as a result of changes in share prices), rather than simply at the current pay package. A claim is often made that CEO pay bears no relationship to company performance. To assess this claim requires rather more sophisticated analysis than is often employed by activists and the media. Using such analysis, it does seem that pay reacts (both positively and negatively) to changes in performance, though possibly less than it should. The widespread adoption of Long-Term Incentive Plans (LTIPs) has been widely criticised; it is felt that these schemes are often badly designed and have led to unnecessary inflation of executive pay. Governments need to be careful in how they react to populist calls for action. The current requirement for large businesses to spell out the basis of their pay structure may be acceptable, and maintaining a watchful eye on pay in the public sector is sensible. But giving the state power permanently to fix pay ratios or even pay caps brings dangers which are not sufficiently discussed by those demanding government intervention.