Tuesday , April 25 2017
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More silliness on executive pay

Summary:
It’s an open secret in think tank land that the period between Christmas and New Year is a great time to get news coverage even if your publication is, ah, a little thin.One example of this was a sloppy study by Change Britain about the gains from leaving the Customs Union and Single Market, which I critiqued here.Another was a paper by the Chartered Financial Analyst Society which claimed to show that there was no link between executive pay and firm performance over the past ten years – so high executive pay is wasteful. It did this by comparing the rise in executive pay over the last ten years (82%) with the rise to returns to investors over the same period (1%). Since 80% is higher than 1%, it’s obvious that paying executives more hasn’t improved firm performance,

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It’s an open secret in think tank land that the period between Christmas and New Year is a great time to get news coverage even if your publication is, ah, a little thin.

One example of this was a sloppy study by Change Britain about the gains from leaving the Customs Union and Single Market, which I critiqued here.

Another was a paper by the Chartered Financial Analyst Society which claimed to show that there was no link between executive pay and firm performance over the past ten years – so high executive pay is wasteful. It did this by comparing the rise in executive pay over the last ten years (82%) with the rise to returns to investors over the same period (1%). 

Since 80% is higher than 1%, it’s obvious that paying executives more hasn’t improved firm performance, right?

Um, no.

First of all, the total pot of CEO pay is much, much smaller (in total, £525 million per year on average across the study period) than the total pot of returns to shareholders – dividends alone were about £75 billion last year. So increasing CEO pay by 80% – £420 million – and dividends alone by 1% – £750 million – means shareholders are better off, even though the percentage rise has been much smaller.

Nobody thinks there’s a mechanical relationship between paying CEOs more and getting better performance for the firm. We think that CEOs matter an increasing amount to their firms (and we have empirical evidence that supports that view), in the same way that computers and the internet do.

Would you be impressed with a paper that showed that IT spending had risen by 100%, but firm performance had only risen by 1%, and claimed that this showed that computers are actually a waste of money? No, me neither. What would have happened to that firm if it hadn’t spend money on computers while its rivals had?

And of course a lot of CEOs’ jobs, especially during and after the Great Recession, are not about maximising short-term profits but firefighting, keeping the firm afloat, retooling for a changing economy. Again, looking at returns on capital misses this.

There’s such a lot of drivel around CEO pay, and it goes mostly unquestioned when it’s released during quiet times of the year.

Incidentally: it’s “Fat Cat Wednesday” today, the day when a lot of people are surprised that big multinational companies pay their Chief Executives as much as 140 of their rank-and-file employees. (Which is a bit like wondering why Apple cares more about its CEO Tim Cook than the staff of the Apple Store at Stratford shopping centre.)

It's a quiet time of year, so it gets coverage. But, apart from pointing at large salaries and saying that they just must be unfair, there's really not much to it.

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Sam Bowman
Sam Bowman is Deputy Director of the Adam Smith Institute, Britain’s leading libertarian think tank, where he has worked since 2010. He is responsible for managing the Institute’s team on a daily basis, working on the ASI’s overall strategy, acting as a media spokesman for the Institute and writing and researching in his spare time.

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