Tuesday, October 19, 2010

Should CEOs justify their wages to the public?

Martin O'Neill has written another excellent piece for The Guardian found here. An excerpt:

"[. . .] The facts about income inequality in the UK are nothing less than mind-boggling. The average income of a FTSE 100 chief executive, according to the most recent Guardian survey of executive pay, is over £3m per year, including bonuses and pension contributions. This is more than 100 times median household income. It is not uncommon for CEOs to run 200 or 300 times as much as the median pay of their employees [. . .] Moreover, executive pay continues to march relentlessly upwards, unconnected to skill, judgment or underlying profitability. While the FTSE lost a third of its value in the year to September 2009, executive pay rose 10% during the same period. According to the Work Foundation, the ratio of average CEO pay to average UK earnings rose from 10:1 in 1980 to 75:1 in 2006 (and has continued to grow since). In short, the gains of economic growth are becoming increasingly concentrated in a small number of hands, while the wages of ordinary people have stagnated.

[. . .] One might respond to these worries by saying that the market cannot be bucked, and that executives are only ever paid what they are worth in a competitive environment. But this is very far from the truth. Most executive pay packages aren't negotiated in a cut-throat marketplace, but are settled by cosy remuneration committees, comprised of other members of the charmed circle of corporate largesse. [. . .] To assume otherwise is to have a naive faith in markets, isolated from the reality of their operation, and unsustainable in the face of recent history.
Cosy remuneration committees breed socially corrosive forms of inequality, but they are also expressions of an underlying inequality. It is precisely because of the existence of clubby circles of excessively concentrated economic power that the lax practice of unjustifiably generous executive pay is so deeply entrenched. Rather than looking only at the consequences of these inequalities, it would make sense to tackle this problem closer to its root. [. . .]."

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