I have the feeling I’ve read this somewhere before…….

If this logic applies to bosses, doesn’t it apply to lots of other people too?

Many of us would struggle to determine the precise value of our work, and most of us can probably remember at least one example of being over-paid for work we found easy, or under-paid for work we found difficult. In the transition from a manufacturing economy to a service economy, we’ve lost the notion that work produces tangible outputs that can be measured according to strict criteria. Instead, many modern professions produce intangible results which are difficult to measure.

I have known people who were almost apologetic about their salaries because they simply couldn’t believe that what they were doing could be considered so valuable, and I have known others who felt under-appreciated because their salaries were low relative to the effort they felt was demanded of them.

The problem is that once we begin with a critique of certain people’s earning power, by isolating them into a ‘class’, we begin to justify measures designed to intervene in their salary arrangements. We might use words like ‘unjust’, ‘failure’ and ‘illusion’ to do so. But once we have ‘fixed’ that problem, what next?

My question would be this: is this a problem involving exploitation of the workers/shareholders by a nefarious ‘managerial class’, or is it something else? Presumably, bosses are able to get away with being paid over the odds because of a lack of accountability. How might we make them more accountable to shareholders? Is the managerial model of business being protected or enforced by the legal structure of corporations? Might the obvious market incentive to reduce the pay of underperforming managers be offset by a force which boosts the power of managers or makes alternatives more difficult to implement? In other words, if there is an inefficiency, we should address the cause and not the symptoms.

Added value isn’t about how hard you work (whether it was easy or difficult) but how effective that work is and the quality of the finished “product”.

I’d find making a chair pretty difficult and the end result would be rubbish – and not worth paying for – but doing accounts i find reasonably easy (it’s part of my job) and i do it properly. My value to the company (well NGO) I work for is greatest when I find the work easiest.

Having said that there is some work that is hard no matter what. It is my constant gripe that cleaners in this country are underpaid, undervalued and overworked – and whilst the job may be regarded as low status it is in fact one of the most important jobs there is – particularly in places like hospitals – but we continue to try to solve hospital cleanliness without addressing the plight of the cleaning staff.

I completely agree, by the way, with the point of the post that it makes no financial sense to pay bosses these increadible salaries – but once they are in a position to have a say over their salaries, collectively with other highly paid execs – of course they’ll all agree that they deserve more, after all who is there to tell them no?

I am fairly sure that this analysis is correct.

If only because in my time as tuck monitor many years ago, I was able to defraud the tuck account in a way that no-one really minded (by eating tuck) – but ultimately had an impact on the profitability of the tuck shop.

No one minded because it was thought of as acceptable that tuck monitors rewarded themselves with copious amounts of cola bottles and mars bars – you see all the other tuck monitors did as well. In fact, as I now recall, you would reward younger boys who behaved with free tuck. Blimey – the economics of innocent fraud and the creation of client-patron relationships all within a minor public school.

Had I known at the time that my year as tuck monitor looked so much like the kleptocratic rule of so many African Big Men, I would have been horrified.

The question remains (as it does for CEOs – and dictators): how could my lardie cola bottle eating ways have been reigned in?

Chris – how do you deal with these vast overgrown tuck monitors who so frequently look like they have been raiding the tuck for so many years?

(incidentally – I readily accept that many such British CEOs may have learnt their lessons in morality as tuck monitors at Britain’s public schools)

A good point Chris – inefficiency in markets.

But how does one resolve this. Is it a result of poor regulation? Not giving shareholders enough power?

An interesting sideline to this particular debate, which is a little too academic and theoretical for my liking.

The Institute of Directors released a survey this week which showed that managing directors of small companies (i.e. – sub £5 million turnover) gets paid an average of £65,000 a year. Above your average punter, yes, but not particularly eyebrow-raising in London and well below the stratospheric and exceptional levels these debates seem to focus their ideas on.

The IoD’s survey did indeed show that the financial services industry is the highest paid, but guess who’s second?

Not your average small company boss, but directors in the public sector.

Food for thought, perhaps.

There is so much information to be handled at the CEO level, that I wonder if an information processing bot could be used to replace the high level decision making, either making the decisions itself or spewing out recommendations to be voted on. There would be no risk of short term-ism, worry about severance packages etc. …maybe one day.

I also wonder if the current state of play actually reflects an inefficiency. It clearly appears so from the outside, but shareholders have ultimate power and they are allowing such packages to pass without batting an eyelid. Perhaps CEOs wouldn’t come aboard without decent severance packages?…maybe they are aware of their own futile impact on the direction of a large company? It’s hard to justify, but this apparent anomaly is persistent, and in this world of profit maximisation at all costs, I wonder if we are all missing something.

Not having ever worked in finance, I’ve not heard of Jensen’s alpha before. But it sounds like it might be worth the time of us lefties learning a little more about this and related calculations.

Regardless of that I agree with Chris’ point the value added by high ranking bosses is seriously questionable. My take on how this situation has come about is as follows.

First, the money required for these pay packages is generally a drop in comparison to company profits/money available.

Second, there are no real restraints in place on the pay of high ranking executives. The only individuals with the power to restrict executive pay are the shareholders, and they are generally not organized/concerned enough to oppose pay settlements.

As a result of these two factors, the level of executive pay rests on what the executives think they are worth. To this end they draw comparisons with other highly paid individuals (other executives, film stars, professional sports people, private equity bosses and such) as a basis for their pay awards. It seems to be politics of envy among a small group of rich individuals.

It’s even worse than that, Andreas, because top executive pay is usually set by a remuneration committee made up of, you guessed it, top executives from other companies.

So it works like this – I sit on Fred’s rem committee and give him a big wad, he sits on yours and gives you a big wad, then you sit on mine and give me a big wad.

Everyone’s a winner. Except the shareholders. And the customers.

I think Andreas and Steve hit the nail on the head. My bank has a supposedly democratic vote (mostly by post) at its AGM, and I can vote against the remuneration report; when they publish the figures, there’s quite a lot of people who do so, but we’re outnumbered by people who just check the quick-and-easy-vote-for-the-board’s-recommendations box. They say they “have to” pay monopoly money to get the “top people”. That money would pay the salaries of hundreds of people doing real work.

Well, one thing a group really focused on making a difference could do is to calculate Jensen’s alpha for an important range of companies (FTSE100 might be an interesting starting point in the UK) and publicising it.

Of course, we’d need someone with Chris’ level of expertise in order to make the calculations rock-solid, because you know that there will be plenty of people who want to question their value.

But if we calculated this figure and published it on a regular basis (every 6 months? every 3 months?) it could make a bit of a splash and just be existing help raise awareness.

So, Liberal Conspiracy, are you up for it?