Vox Political: Bank of England Economist Says High Executive Pay Damages Economy

Mike over at Vox Political has posted a piece about the remarks by Andy Haldane, the Chief Economist at the Bank of England, that Britain’s economy is being damaged by exorbitantly high executive pay. An article in the Independent notes that the average pay of FTSE 100 bosses is now 150 times that of the average UK worker. The Indie then went on to say

This large and growing remuneration gap, Mr Haldane said, “drive[s] a wedge between management and employees…that in turn erodes social capital. A company, like a country, whose physical and social capital is being eroded is one whose wealth-creation capacity is being impaired.”

Social capital refers to trust and relationships in a society and Mr Haldane argued this matters “every bit as much to wealth and well-being” as financial capital such as stocks and shares and other such assets.

It also reported that there have been a number of shareholder rebellions against the high pay awarded to chief executives.

Mike comments

Trust between bosses and employees is at an all-time low – not helped by Conservative Government policies that trample on workers and try to reduce their rights and remuneration. Look at the junior doctors’ strike for an example.

Mr Haldane is saying the direct result of this is harm to the economy, and we can see that this is true.

Why would any worker want to provide a high-quality product for an employer who is ripping them off?

And if they lose their job, why would the next worker want to provide a high-quality product for an employer who is paying them less than the last worker (because they can)?

Go read Mike’s piece at http://voxpoliticalonline.com/2016/05/19/highly-paid-bosses-are-harming-the-economy-says-bank-of-england-bigwig/ for more information and his very relevant remarks.

Chang Capitalism Book pic

The Korean-born economist, Ha-Joon Chang tackles this problem in his book 23 Things They Don’t Tell You About Capitalism in the chapter ‘Thing 14 US Managers Are Over-Priced’. Chang concentrates on American managers because they are paid a whopping 300-400 times that of the average American blue-collar Jose or Josie. They are paid way more than the managers of comparable companies elsewhere in the world, including Japan. The chapter is an attack on the Neo-Liberal attitude that if the managers are paid so much more than their counterparts elsewhere in the world, and their workforce, it must be because their performance is somehow worth it in the market economy. Chang shows that this is not the case. He argues that US managers now are not more efficient and effective than they were a generation ago, when they were only paid 30 to 40 times more than their workers. And they certainly aren’t worth that money compared to their European and Japanese competitors, who are actually beating them.

Finally, he discusses the damage such executive pay actually does to the wider economy. He argues that the managerial class now has so much power through their contacts in government and their grossly inflated pay that even when they fail, they are not punished, but instead rewarded. They most they receive are extremely generous severance packages. And the people who have to suffer, ultimately, to pay for their bloated salaries are the workers and the taxpayers, who have had to bail out the banks. He writes

Despite this, little is done to check excessive and biased (in that failures are hardly punished) executive pay packages because the managerial classes in the US and Britain have become so powerful, not least because of the fat paycheques they have been getting over the last few decades. They have come to control the boardrooms, through interlocking directorship and manipulation of information that they provide to independent directors, and as a result few boards of directors question the level and the structure of executive pay set by the CEO. High and rising dividend payments also keep the shareholders happy. By flexing their economic muscle, the managerial classes have gained enormous influence over the political sphere, including the supposedly centre-left parties such as Britain’s New Labour and America’s Democratic Party. Especially in the US, many private sector CEOs end up running government departments. Most importantly, they have used their economic and political influence to spread the free-market ideology that says that whatever exists must be there because it the most efficient.

The power of this managerial class has been most vividly demonstrated by the aftermath of the 2008 financial crisis. When the American and the British governments injected astronomical sums of taxpayers’ money into troubled financial institutions in the autumn of 2008, few of the managers who were responsible for their institutions failure were punished. Yes, a small number of CEOs have lost their jobs, but few of those who have remained in their jobs have taken a serious pay cut and there has been an enormous, and effective, resistance to the attempt by the US Congress to put a cap on pay of the managers of financial firms receiving taxpayers’ money. The British government refused to do anything about the £15-20 million pensions payout (which gives him around £700,000 yearly income) to the disgraced former boss of the R.B.S. (Royal Bank of Scotland), Sir Fred Goodwin, although the intense negative publicity forced him subsequently to return £4 million. The fact that the British and the American taxpayers, who have become the shareholders of the bailed-out financial institutions, cannot even punish their now-employees for poor performance and force them to accept a more efficient compensation scheme shows the extent of power that the managerial class now possesses in these countries.

Markets weed out inefficient practices, but only when no one has sufficient power to manipulate them. Moreover, even if they are eventually weeded out, one-sided managerial compensation packages impose huge costs on the rest of the economy while they last. The workers have to be constantly squeezed through downward pressure on wages, casualization of employment and permanent downsizing, so that the managers can generate enough extra profits to distribute to the shareholders and keep them from raising issues with high executive pay (for more on this, see Thing 2). Having to maximise dividends to keep the shareholders quiet, investment is minimized, weakening the company’s long-term productive capabilities. When combined with excessive managerial pay, this puts the American and British firms at a disadvantage in international competition, eventually costing the workers their jobs. Finally, when things go wrong on a large scale, as in the 2008 financial crisis, taxpayers are forced to bail out the failed companies, while the managers who created the failure get off almost scot-free.

When the managerial classes in the US and, to a lesser extent Britain, possess such economic, political and ideological power that they can manipulate the market and pass on the negative consequences of their actions to other people, it is an illusion to think that executive pay is something whose optimal levels and structures are going to be, and should be, determined by the market. (pp. 155-6).

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One Response to “Vox Political: Bank of England Economist Says High Executive Pay Damages Economy”

  1. 61chrissterry Says:

    Reblogged this on 61chrissterry.

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