1. Two sub-claims. Some people claim the very high compensation given executives of large corporations is a necessary evil. Evil because there is something inherently unjust, grotesque, perverse, harmful about giving luxury purchasing power far beyond what anyone needs for a wonderful, fulfilled life to a few while hundreds of millions are not allowed enough for clean water, food, basic medical care, hygiene, and education. Necessary because without a system in which top executives receive astronomical salaries and bonuses : a) Productivity and hence average standard of living will be lower b) Basic freedoms will be curtailed. Vast inequities in wealth are the price you have to pay for a free society; better poverty and starvation than red. In this feuilleton I just look at sub-claim a).
2. The assumption behind a) is that extremely high compensation is a necessary condition of attracting capable people to top executive positions in large corporations. The golden carrot hypothesis. There has to be exceptionally high remuneration otherwise talented people won't take on the training for, and responsibility and hard work of, executive positions. As with many underlying assumptions behind views or positions in which people are emotionally invested as soon as you try to state the hypothesis clearly its absurdity becomes apparent. Does anyone seriously believe that most top university graduates would rather clean toilets, work on an assembly line, drive a cab, be a shop assistant, on welfare than help run a hospital, airline, automobile factory, bank, crown corporation, government ministry, or university? Can it be maintained that running a large corporation well requires esoteric expertise as difficult to acquire as brain surgery, being a concert pianist, and flying a jumbo jet combined? As Peter Cook implied in a 'Beyond the Fringe' satire : which would you rather - be a judge or work in a coal mine?
3. Sub-claim a) only seems to make sense because of a confusion between two different points about human motivation and money. The first point is that high material rewards are a powerful motivator. The second but different point is that once people get used to a high reward they may require an even higher one to remain motivated. Thus, a person receiving high compensation may be inclined to move for an even higher reward if he/she can get it. In other words, many human beings have an almost insatiable capacity for greed (or power, status, sex).
This second point about motivation and money, though, does not entail the need for extremely high compensation for top executives or anyone else (sports or entertainment stars, concert violinists, politicians, judges, doctors, lawyers, etc.) This is because there is an almost endless supply of talented capable people who are very motivated by high though not astronomical remuneration. $200,000 a year, say, may not seem that high when you have been making it for a few years. So what?! There is a wealth (sic) of people with exceptional ability and expertise to whom that $200,000 represents a fantastic inducement. If a Canadian administrator/executive/entrepreneur can double his $200,000 a year by moving to the USA, let him(her) go, and good riddance. There are lots of others not noticeably in any way inferior in qualifications, ability, expertise, enterprise, initiative, humanity, people skills, sensitivity, understanding who will gladly take his(her) place.
4. The argument for extremely high executive compensation may still seem to retain some strength because of a further confusion between being de facto top of an organisation and being the best in or for that organisation. These two are quite different. There are many documented instances of people in top positions in organisations - corporations, government, universities, banks, the military - being inefficient, incompetent, unbalanced, lackling in people skills, emotional awareness, etc. (being selfish, greedy, corrupt, tyrannical, psychopathic is another matter). Incompetent or mediocre people can get to the top because of nepotism, favoritism, religion, getting in when times were easier, being a sycophant, backstabber, etc.
5. Here those arguing in favour of, or the need for, very high executive compensation may fall back on the survival of the fittest argument. Those at the very top of an organisation must, it is said, be the best (and deserving of all they can get) because they rose to the top in open competition. The flaw in this argument is that the notion of capitalist free market open competition is a myth. The point of having power in society is to prevent open competition, to exclude others who may be smarter, more talented, shrewd, far-sighted, incisive, with deeper understanding than you from doing your job better and for less money. People who have power - the executive class, lawyers, economist/technocrats, professional associations, trade unions - continually erect artificial barriers to prevent others competing with them and bringing down their income. People fight to protect their own privileges and give their friends and family members an unfair advantage.
6. 'The bigger the reward the more the incentive.' This sounds plausible only if you think of one individual and a limitless supply of reward. But we are dealing with providing incentives/inducement/motivation for thousands of people at a time to help bring about a more prosperous, efficient, beneficent organisation (and the total reward on offer is necessarily limited). Another weakness, then, in the golden carrot hypothesis favouring colossal remuneration for executives is that it assumes a winner takes all reward provides better incentive overall than spreading the rewards around. This is highly dubious. Most talented people know it is highly unlikely they will be in the top few no matter how hard they work (you need luck, etc.) They would be more motivated by providing instead of a handful of astronomical rewards a much greater number of moderately high rewards for being in the top 10%.
7. A related weakness in the golden carrot hypothesis is the equally implausible view that the prosperity, efficiency, well-being of an organisation (corporation, society) depends wholly or mainly on having a few brilliant (perhaps ruthless) people in the top few positions.
8. In summary : even if you assume financial greed is the greatest motivator for human beings the argument for extremely high executive compensation fails. Of course the existence of great artists, writers, composers, scientists, thinkers, moral teachers, etc. shows that it is false that financial greed is the only strong human motivator.
9. Psychological basis for unreasonable beliefs. As with most social, philosophical, political, religious, moral, or aesthetic positions the basis for the view that huge executive compensation is somehow warranted, necessary, or unavoidable is emotional not rational. You can't make someone give up an unreasonable position just by appealing to logic and evidence. Perhaps those who support or condone astronomical compensation for executives of large corporations (and are not themselves executives or super rich!) do not like to admit that they are being ripped off by, are dupes of, the executive class. Many still cling to the fantasy that everyone (all 6 billion of us!) can be a millionaire. As though the planet could sustain everyone living at the level of the top 10 0r 20% of Canadians. Maybe many fear that if the compensation for top executives is limited they may be next. Someone might point out that their compensation or wealth too is unfairly and unnecessarily high (especially by world standards).
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We've also discussed before how the undemocratic way in which publicly-owned companies actually function is also a barrier to more sane compensation. I am certain that most individual shareholders would prefer, say, a slightly higher dividend than a huge compensation package for the CEO. However, individual shareholders rarely achieve much of a voice for themselves.
ReplyDeleteWarren Buffett famously rages against this phenomenon, whereby Boards and executives of public corporations have a sense of arrogance and superiority over shareholders, when in reality they are (ought to be) subordinate to the shareholders as the owners of the company. For example, of all the companies currently having say-on-pay measures put forward in their AGMs by activist shareholders, the boards invariably recommend sternly against such measures. The individual shareholder votes for the measure, but many large and institutional shareholders follow the board out of ignorance or deference.
Part of the solution is surely for large investors that ostensibly have a large man-in-the-street or populist base, such as Ontario Teachers or many pension funds, to enable (or even force, or incentivise) their own membership to vote directly on ownership matters for the companies they hold. Currently these large investors effectively outsource their votes to investment management firms that presumably vote along their own lines rather than the preferences of the real owners.
Otherwise, your average consumer, if they are disengaged from e.g. the shareholder voting process at Coca-Cola (even if they own Coca-Cola, possibly without realising it, through their pension), is effectively voting "YES" to executive compensation at Coca-Cola every time they buy a Coke, a Minute-Maid juice, a Powerade, or a Dasani water, or any number of products.