“What then?” sang Plato’s ghost
On the front page of Saturday’s Financial Times was yet another article about excessive executive pay, citing the obscene ratios for the earnings of the highest paid to the average: 181 times more at Barclays; 120 times for the FTSE 100 in 2013 (although the ratio was only 47 fifteen years before); limited to 75 times at the John Lewis Partnership. And, we were told, Plato felt that “five to one was the proper ratio for the wealthiest Athenians”. Sadly this contribution to the debate was little more than Google-journalism, dragging out an observation from a management book published in 1991 which reappears every five years or so, not always accurately.
Unfortunately the discussion in Plato is somewhat obscure, to say the least. It arises in a passage in the Laws (V 744de) limiting the richest class to acquiring no more than four times the amount of the poverty limit (πενίας ὅρος, a term which appears to include the basic unit of land and the tools and animals necessary for its cultivation), which, as Aristotle explains in the Politics (1265b 22, 1266b 7, although this too is disputed), implies a limit of total property of five times the minimum. In Plato’s ideal city state, anyone who acquires (by whatever means) more than the limit forfeits the surplus and is fined as much again.
As you can see however the limit is on assets, not income; and the denominator of the ratio is the minimum, not the average. Such details hardly matter, particularly since Plato’s discussion is unfortunately embedded in numerology (5040 comes into this, which some of you will recognise as factorial 7; don’t worry if you don’t), and it is easy to dismiss him as a crackpot. Come to think of it all philosophers are a bit suspect from a banker’s perspective.
So how do we frame the executive pay debate in terms the City will recognise? Readers of this blog will recognise these simple propositions:
- Companies are run to maximise shareholder value. (You can muddy the debate by imputing a broader societal duty, but you don’t need to, and the message is clearer without.)
- Shareholders are better off paying the minimum to staff, consistent with recruiting and retaining the best.
- When you hire professional staff they will undertake to work as hard as junior doctors just to get the job.
- No honest professional takes a different decision because of alignment. That myth was dispelled by Lehman. They don’t need skin in the game, nor a dog in the fight – although they will do the barking for free.
- The myth that pay is linked to performance was finally exploded by Barclays’ recent behaviour. And that’s without asking the more important question about why on earth shareholders should pay staff for profits earned at the expense of other companies we own.
- Staff won’t come and will go if they are offered more elsewhere. “More” means what they perceive as more: deferral and claw-back may protect shareholders but are sufficiently unattractive to staff that they will demand more. Not just more, but more more, in a way that results in shareholders and staff being worse off than with fixed salaries when risk-adjusted numbers are properly computed.
- The threat to go to non-banking institutions or those in tax havens is largely empty. That is because bankers principally make money out of the implicit support of governments in countries with economies big enough to support them.
The clear conclusion from these propositions is that we are all (apart from the bankers themselves) better off if governments in developed countries join together to bring in a cap on total compensation in all banks. The EU’s attempts to do this are imperfect, but they should be improved, not legally challenged, by our government.
It is easy to see how we have got into this mess, and journalists have usefully highlighted the conflicts of interest for remuneration committees that drive this spiral in the wrong direction.
Another clue has recently appeared in the letters column of the FT, about whether a bank employee is a “banker” or whether this term should be restricted to those who own banks. Soon after I joined a merchant bank, my wife met a friend (whose family, fortuitously, owned a large shareholding in the bank – this was just before Big Bang), and suggested they use “Neil’s car”. The response – “Actually that’s my car.” – reminded us of the true position. I was surprised to find that the Oxford English Dictionary accepts banker as “the keeper or manager of a bank” without historical distinction – although one of the illustrations, from Swift, will chime in with current thinking:
The daily encrease of Bankers, who may be a necessary Evil in a Trading-Country, but so ruinous in Ours.
The point of course is that, whatever the dictionary suggests, bank employees have, since the 1980s, usurped the position of proprietors, including taking their rewards despite providing no capital. Giving them capital gratuitously, as Tyrie wants, is hardly the answer.
The real tragedy of executive excess is not simply unfairness: it is what happens to society when a whole generation of the best talent is drawn into the pursuit of the socially useless to the detriment of education, medicine, infrastructure and even politics – all of which show the signs now of a fundamental lack of competence.
And for those drawn into the City, their careers result at best in philanthropy rather than the real satisfaction of the non-monetary contribution their talents could have made.
But louder sang that ghost, “What then?”