Markets blog

Outsized executive pay and the myth of "mobile talent"

Pay rises at Anglo-Irish Bank are currently causing controversy after the nationalised lender upped salaries for some 70 of its 1240 staff.  Banking pay rates have been a political hot potato for some time now, and not just in Ireland.  Is popular outrage merited or are outsized pay packages needed to prevent banking ‘talent’ from migrating elsewhere?

It’s pretty obvious that the obscene pay doled out to top CEOs in recent years is, well, obscene.  Lehman CEO Dick Fuld received almost $500 million in the years leading up to the bank’s bankruptcy while Merrill Lynch’s Stanley O’Neal took away a compensation package worth $161.5 million after he was shown the door in 2007.  Not bad for two of the worst CEOs of all time.  “What the hell kind of system is this?” as legendary investor Jim Rogers last year asked.   

Extreme examples?  Sure.  Certainly, executives continue to insist that they need to be, er, incentivised.  “Talent is highly mobile,” Barclays CEO John Varley said last year.  “If we fail to pay or are constrained from paying competitive rates then that talent will move to another employer.”

But will it really?  US data implies that the case is vastly overstated.  104 senior executives have had their pay set by the federal pay regulator in the last two years.  88, or almost 85%, are still with the companies today even though their pay has been slashed (compensation for the top earners is reportedly down by 77% since 2008).

It shouldn’t come as a surprise.  The 2007 Towers Perrin Global Workforce Study interviewed 90,000 employees in 18 countries and found that while generous pay was the prime reason why people joined a company, it didn’t feature in the top 10 reasons for wanting to leave a company.  

That’s one of many such stats trotted out by David Bolchover, author of Pay Check: Are Top Earners Really Worth It? Bolchover notes that the average CEO in the US earned 42 times the average blue-collar worker’s pay in 1980; by 2000, that multiple had ballooned to 531.  He also cites the case of Royal Dutch Shell’s Jeroen van der Veer, who stepped down as CEO in 2009.  “You have to realise: if I had been paid 50% more, I would not have done it better”, the Dutchman said.  “If I had been paid 50% less, then I would not have done it worse."  Shell must not have realised this, considering they had put in place reward schemes that upped his pay by more than 50% (from €6.5m to €10.3m).

Don’t think that Bolchover is Bolshevik (pardon the pun) in his political leanings.  “I come at this from the political right”, he says, arguing that massive corporate pay incentivises people to “climb their way up the greasy pole... and become wealthy without having to take any risk, without having one original idea”, thereby proving to be a “disincentive to entrepreneurship”.

We’d all like more pay, of course, so it’s only natural that bankers and the likes will peddle this stuff about the mobility of talent and how the world will end if they are not paid a gazillion euro per year.  The US data, however, implies that they’re not as quick to jump ship as they’ve been letting on.  “Gee, complaining execs turn out to be full of crap”, Barry Ritholtz concludes.  “Who could have ever seen that coming?”

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