More accountability on CEO pay?
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More accountability on CEO pay?

Paul Holmes

In a reminder—as Americans watch Republican presidential hopefuls compete over who can widen income gaps the fastest—that conservatism does not have to be about serving the interests of the ultra-wealthy, the UK Conservative Party is considering a number of measures to rein in CEO compensation, and specifically to address the growing disconnect between pay and performance. One of the most troubling developments of the past 20 years is the rise of the “cult of the CEO,” which has led to a widening gap between senior executive compensation and the pay of ordinary workers—and to a crony compensation system that provides even failed CEOs with rewards beyond the wildest dreams of most hard-working employees. Writing about the compensation package recently presented to new Apple chief executive  Tim Cook, Slate’s Matt Yglesias captures a little of what makes the CEO compensation “market” so peculiar: “It's certainly striking that the CEO labor market operates in some very unusual ways. There's no indication that Apple was in a bidding war over Tim Cook's talents. Nor is there much indication that Apple set a price it was willing to pay for a CEO and then actively sought out the strongest candidate willing to take the position for the money on offer. “Rather, it was decided… that Cook was the anointed successor and then a basically unrelated process determined that this should be his compensation package. And the thinking behind it largely seems to be that a great big rich company deserves to have a great big rich CEO, so here's a generous offer.” This seems to me to be an entirely obvious distortion of the free market, the result of system in which CEOs appoint the boards of directors who then set the CEO’s compensation package, couple with the view—entirely unsupported by any empirical evidence I have ever seen—that extraordinary levels of pay will lead to extraordinary improvement in corporate performance and/or shareholder returns. (The historical record, comparing share price gains 50 years ago—when the gap between CEO and worker pay was not nearly so wide—to those of today, would suggest that the opposite is true.) In any event, the Tories are talking about regulations that would increase transparency about executive pay (I’d like to see a mandatory annual meeting of employees at which the CEO is required to provide full disclosure of all compensation and explain why he deserves to take home 150 times more than the average worker) and provide shareholders with expanded democratic processes to override cozy boardroom deals. I am not sure that any of the ideas being discussed in the UK will have a meaningful impact on CEO compensation. One thing I would be willing to make a huge bet on, however: even if CEO pay is constrained, and even if many CEOs find the pay packages offered by UK companies “uncompetitive” as a result, the impact on the performance and profitability of UK companies will be either (a) zero or (b) hugely positive.
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