Do You Have What It Takes?

If you’re about 74 inches tall, have a deep voice, and have run a marathon, you may. The Economist’s recent article, Look of a Leader, found; “It is remarkable, in this supposed age of diversity, how many bosses still conform to the stereotype.” The article included a mixture of studies describing the characteristics of chief executive officers (CEOs) and other leaders.

A second article in The Guardian this year, reported that extravagant CEO pay doesn’t reflect performance – it’s all about keeping up in a status race. What do you think?

Even American eyes are starting to pop at the sheer extravagance of executive pay. Last week, the New York Times published its annual league table of chief executive pay at the US’s top 100 publicly quoted companies. The average has now climbed to $13.9m (£8.3m).

That is nearly twice the average of £4.4m for CEOs within Britain’s top 100. But since America’s top 100 companies are, on average, around three times larger in terms of turnover than our own, one could argue that executives are even better paid in Britain.

A growing number of US commentators are asking, as are some of the braver remuneration consultants, just why executives in America need to be paid so much. The LA Times, for example, headlined one opinion piece “Obscenely high salaries are stark reminders of US wealth gap”. The NYT talked about the dark side of executive pay driving US inequality. What do these men – and 91 of the 100 are men – actually do with so much money?

The rationale is that such pay is needed to drive “performance”. One of the eye-catching examples was Oracle’s Larry Ellison, already the world’s fifth richest man, who collected $78.4m in 2013. But does he need so much cash to push Oracle’s performance, and if so, why does Larry Page at Google need only $1m? It was true that 26 CEOs on the list saw their remuneration fall slightly, but that was more than offset by some astonishing and quirky rises. A fall in any one year is quickly compensated by a vast increase later.

It is beginning to be obvious that performance has hardly anything to do with the sustained rise in executive pay. Why should British CEOs in charge of smaller, generally less complex companies be paid proportionally more than their counterparts in the US? Does it make sense that 60% of pay comes in options to buy shares, so that executive focus is wholly on doing those things – cutting investment, avoiding risky innovation, using cash to buy company shares etc – that keep up the share price. CEO pay has been sky high in the US for a decade and has doubled in Britain over the same period, but has economic and corporate performance been that stellar in either country? Some economists argue that it is the direct cause of the collapse of business investment in both countries. Even the most eloquent apologists are increasingly mute.

Today the successful CEO shows the predator instincts behind his success by doing something extravagantly but peacefully competitive – taking part in the America’s Cup (Ellison), ballooning (Richard Branson) or racing at Le Mans. Owning an island in the Pacific (Ellison owns Lanai in Hawaii) or Caribbean shows your need for extreme privacy and luxury – the quintessential expression of a natural aristocrat.

There are remedies: what is needed is the political coalition to deliver them. The dilemma is that society needs successful business and politicians, especially on the left, but do not want to be painted as anti-business. Yet something must be done. The reaction last week to the NYT figures suggests a long overdue change in the US debate, which sets the tone worldwide. From this year, for example, US companies are compelled to publish the ratio of top pay to the median. It’s a straw in the wind – and Labour, if elected, will follow suit. Maybe, just maybe, the times are a’changing. They need to.

 
 
 

Lexington Wealth Management