It is not hard to see how a proposal by Britain’s hard-left Labour leader, Jeremy Corbyn, for top pay to be capped at twenty times the wage of a company’s lowest paid worker could find support among 57% of the British public3. While the average CEO pay package was almost £5.5 million in 2015, just a quarter of the FTSE 100 companies were accredited as Living Wage employers – committed to paying a minimum £8.45 an hour in the UK4. In America, 50% of the public favour limiting the pay of big business executives5. [...]
In fact, other countries have managed without resorting to such excess. An internationally comparative measure is compiled by Bloomberg, with America and the UK topping the list for developed nations7. By this measure bosses in America make 300 times that of the average person, while British bosses earn 230 times as much. The ratio for Australia is 113 to one, in France it is 70:1 and in Denmark 83:1, clearly showing that sky-high pay is not a prerequisite of capitalism, but rather a feature of particular market models. Models that have lost the faith of the public.
The rise of share options as part of executive compensation is one reason for this disparity. Already large CEO pay packets in American and UK firms have risen in line with stocks, widening the differential between the pay of executives and their subordinates8. American CEOs are particularly likely to have these incentives compared to their European counterparts. Weak corporate governance is another factor, with European firms more likely to experience closer scrutiny from creditors and independent boards. In contrast, American firms are more likely to combine the CEO and Chairman role, plainly undermining the independent scrutiny function of the board9. Harvard Law School found that as well as being an “inherent conflict of interest”, having a combined CEO/Chairman costs more, presents greater risk and delivers lower stock returns over the long term10. [...]
Shareholders should think again. Analysis by Marianne Bertrand and Sendhill Mullainathan found that in companies with poor governance, CEOs typically pay themselves more for improvements in profit which arise from luck. They are also more likely to award themselves stock options at lower cost. Adding a large shareholder to the board led to a sizeable reduction in pay for luck, for example, by 23-33%13.
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