On Excessive Executive Pay

January 26, 2012

Vince Cable’s been in the news with his proposals for curbing executive pay. These amount to small increases in transparency and shareholder power, and have been vilified by both left and right, normally a proxy for good Lib Dem policy-making. George Monbiot wants to see a cap on maximum pay, set at a level amusingly below that of his editor. The IEA thinks the Government should stay out of the business of executive pay entirely, and that shareholder interference should be avoided.

The Right argues that high executive pay is the result of a newly globalised market for executives pushing up prices. This appears to be based on the assumption that a global market will be competing for a fixed pool of executives, and the expansion of that pool will therefore increase wages paid. It would also imply that executive pay should be proportional to exposure to foreign markets. Let’s test this. As a proxy for exposure to foreign markets, I will use both inflows and outflows of foreign direct investment, and stats for the US as they’re the easiest to come by:

Sources: Forbes/OECD

That looks like a pretty strong correlation to me. Having a cap on wages would only mean that Britain wouldn’t have access to the international executive market. If there is a limited supply of executive talent globally – and the stats appear to indicate that is the case – it’s worth considering why this should be the case. The strength of the market should incentivise more people to try to enter it. An explanation may be that overseas expansion by multinationals pushes out competition, and this combined with overseas merger & acquisition activity would serve to reduce the pool of individuals with global CEO experience. However, having fewer firms in competition for CEOs should also lower CEO compensation.

It may be that barriers to entry are unnaturally high as a result of corporate directors picking people like themselves, in which case Cable’s reforms should have concentrated less on shareholder representation over executive salaries themselves and more on ensuring that shareholders are represented during the shortlisting process. However, it’s clear that while his reforms are welcome, they don’t get at the root of the problem. High executive pay is a global phenomenon, and has little to do with the UK’s corporate governance.

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I don’t normally defend property speculators, but there’s an important concern that Vince’s endorsement of a land value tax in his speech fails to address. It’s the corollary of the little old lady argument; that LVT is unfair because it could potentially force out a little old lady who lives in a house that’s been rising in price over her lifetime owing to factors outside her control. That can be mitigated if the tax is implemented in a progressive (in the technical, non-wanky sense) way, but there’s another objection which is less endearing but still important.

Say you own a plot of land on the outskirts of the city. As the city expands, and development around your plot of land increases, the value of your land – and the tax you pay on it – will also rise. Say you decide to cash in by building houses on that land. You apply for planning permission, only to be refused on the grounds of residential amenity for the people already living there. Your tax will continue to rise, but you won’t be able to profit from your land, and you certainly won’t be able to sell a piece of land that can only ever represent a financial drain.

I’m sure many won’t weep for property speculators, but it doesn’t stop that from being unfair. LVT should work hand in hand with planning reform, otherwise it’ll be illiberal.