Don't let highly paid bosses tell you that their huge pay packets happened because of 'inevitable market forces'

These are not risk-taking entrepreneurs, or individuals with vanishingly rare talents like top footballers. So what's the real reason their salaries are so high?

Ben Chu
Sunday 10 September 2017 22:11
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Louise Richardson is the vice chancellor at Oxford University, with a salary of £350,000
Louise Richardson is the vice chancellor at Oxford University, with a salary of £350,000

Seventeen years ago, when I left Oxford, the university's vice chancellor – essentially the boss of the ancient seat of learning – was a man called Colin Lucas. He was paid around £100,000 in today’s money. Today the incumbent, Louise Richardson, receives £350,000. That’s a 250 per cent real terms increase.

Over the same time period, the median average full-time UK worker’s wages are up from £26,000 to £28,000, growth of only about 10 per cent. The average university lecturer’s salary has risen by a similarly modest increment.

Why the discrepancy?

Because there is a “global marketplace” for people with the talent to run a top university, according to Richardson in a BBC interview last week. Oxford has to pay more to get the best, is her argument. So market forces determined her pay. Sadly, the demand for lesser workers simply hasn't kept pace - and therefore nor have their salaries.

At the turn of the millennium, UK FTSE 100 chief executives were paid, on average, about £1.4m a year in today’s money. Today that figure is £4.5m. A 220 per cent increase. Why? The intensification of international competition for talent is the same answer generally offered. Those market forces, once more.

It’s true that the pay of company and university bosses in America has exploded. Indeed, the sums earned by their British counterparts look modest by comparison. And one can find examples (although they are actually pretty rare) of UK bosses making a transatlantic crossing to take up a better-paid job.

Yet it’s rather difficult to argue that the explosion of US pay at the top reflects great leaps in the personal productivity of leaders of what are, ultimately, large bureaucracies. These are not risk-taking entrepreneurs, or individuals with vanishingly rare talents like top footballers. Yes, the organisations they lead have often grown bigger and more complex over the years, arguably making the leaders’ jobs more demanding. But that’s true of many jobs, not just those at the top.

The reality is that what we are seeing in runaway pay at the top is less an inexorable result of efficient market forces than a profound shift in social “norms” – or the informal rules of behaviour which bind a society together – about acceptable pay at the summit of such organisations.

Those social norms have changed, both in the US and the UK. Restraint has been considerably loosened. Or, to be precise, those norms have changed among the people who set the pay of people at the top – the independent boards of trustees, the remuneration committees, and those other panels of top pay “deciders”. The attitudes among those who do not sit on these panels have not shifted very much at all, as demonstrated by the widespread popular anger at such excesses.

Japanese and Scandinavian boss-to-worker pay ratios have not leapt spectacularly like those in the Anglophone world. And it’s hardly possible to argue that those countries are not embedded in the global economy, as anyone who has bought an Ikea sofa or a Panasonic TV will attest. Yet older norms about the acceptability of pay levels at the top of organisations relative to the rest of society have, for a variety of reasons, survived among the pay-deciding classes there. So much for those inescapable international market forces.

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A new economics textbook has been put together in an effort led by Wendy Carlin and Samuel Bowles – partly in response to the complaints of undergraduate economics students over the irrelevance of what they were being taught to the phenomena, such as rising inequality, they are most interested in.

And what economic students have been fed is very often a variant on the supremely influential 1948 textbook by the great American economist Paul Samuelson. Bowles and Carlin challenge the benchmark analysis offered in Samuelson’s textbook that people’s behaviour can be usefully summed up as consistently self-interested and that markets can be modelled as perfectly competitive.

The authors point out that we humans also have other powerful motives for our behaviour, such as a sense of fairness and reciprocity. Bowles and Carlin certainly don’t deny that people respond to personal financial incentives. But they argue for a more nuanced understanding of the operation of these incentives and show how they can sometimes be overridden and contained by powerful social institutions.

“I don’t care who writes a nation’s laws, or crafts its advanced treatises, if I can write its economics textbooks,” Samuelson once quipped. He was more right than he perhaps realised. One of the reasons norms on high pay have shifted in the UK and the US is that the basic perspective on human economic relations outlined in Samuelson’s introductory textbook were taken literally by politicians and commentators across the political spectrum. The simplistic doctrine of eternally efficient “market forces” entered the intellectual bloodstream.

The eminently sensible Samuelson actually found that tendency unfortunate. But the new way of thinking nevertheless provided some people – the top pay-deciders – with a scientific-sounding justification for making choices that would once have left them deeply embarrassed.

So did one economics textbook deliver the inequality crisis we see around us? Of course not. Simple greed, political opportunism, technological change and the decline in the influence of labour unions were also crucial factors. But simplistic and misapplied economics played a part.

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