Fraser Nelson is wrong about the deserving rich

On Friday, the Daily Telegraph published an article by Fraser Nelson arguing, essentially, that we should not make a fuss about the rise of the super-rich.

On Friday, the Daily Telegraph published an article by Fraser Nelson arguing, essentially, that we should not make a fuss about the rise of the super-rich.

Nelson says that there’s not much that can be done to constrain the runaway growth in the incomes of top-earners, and it isn’t a big problem anyway – bankers’ bonuses and executive pay packages are a broadly accurate reflection of their economic value.

Though it’s a thought-provoking piece and makes some valid observations, much of the evidence that Nelson presents to explain how he arrived at his conclusion is misleading.

The article begins by relating the pay of figures like David Beckham or JK Rowling to those of “architects, lawyers, computer programmers – and, yes, financiers”.

Many highly-paid executives are fond of this comparison – who wouldn’t be? – but it isn’t valid. Beckham and Rowling are paid lots (arguably too much) because their talent or contribution is tangible and unique. No-one else would have authored the Harry Potter books if Rowling had not done so. For many years, Beckham’s ability to kick a football about while maintaining a nice haircut was unparalleled in all of England.

Executive ‘talent’ is more difficult to quantify. Nearly all FTSE 100 CEOs are managers, not entrepreneurs. Rather than having started their own company from nothing, they have taken over successful businesses with long histories and established revenue streams.

While some executives have advanced their organisations, rapid pay escalation in the UK has not been limited to these cases  – the below chart shows that though the value of the FTSE 100 index fluctuated throughout the noughties, executive pay increased inexorably.

Graph luke

Though Nelson points out that in a globalised economy “the difference a good (or bad) chief executive can make is far greater nowadays because the companies are so much bigger”, this means it is increasingly implausible to argue that the fate of a company with hundreds of thousands of employees and operations on multiple continents is dictated by one or two individuals in the head office.

A supposedly successful CEO might rely on advice from colleagues closer to specific areas of the business; innovations lower down the company hierarchy; and the commitment and efficiency of all employees when implementing strategy

That’s not to mention the extent to which companies are dependent on external factors – the economic development and stability of their key markets; the availability of skilled and educated workers; wider technological advances (in the UK the government provides around a third of R&D funding).

Even if a company’s success could be attributed to brilliant leadership, this would not necessarily justify the current extraordinary levels of pay (around £4.3 million per year for a FTSE 100 CEO, 175 times the national average).

Research from the University of Delaware found that on average CEOs promoted from within an organisation are significantly more successful than those recruited from another company. The findings suggest that it is not innate leadership qualities that make for a successful CEO, but a good understanding of the company, its culture and its strength and weaknesses.

This results from nurture and experience, rather than inherent talent – thoughtful succession planning and investment in employee development is a better way of guaranteeing a high quality CEO appointment than an excessively lavish pay package.

This explains why the notion of super-rich ‘wealth creators’ bestowing prosperity on the hapless masses is not only a bit demeaning, but also wildly inaccurate. It still doesn’t explain why it is important, and Fraser Nelson says that it isn’t.

“While there is not much David Cameron can do about the rich, there is still plenty he can do about the poor,” Nelson adds.

However, this is not a choice between two mutually exclusive options. The poor are poorer because the rich are taking an ever greater share of the national income – 14 per cent for the top 1 per cent, up from less than 6 per cent in the late 1970s, according to the World top incomes database.

The economy’s capacity for growth is finite – if the rich take a bigger slice of the cake, that means less for everyone else. Indeed the economist Gavyn Davies explicitly links the two. Davies argues that the global stock market boom that has greatly enriched executives and financiers – and inflated pay for other high-earning professions such as lawyers, consultants and public sector managers – has been achieved largely by holding down the wages of ordinary workers.

Seen in this light, the growth in top pay is not the benign irrelevance caricatured by Nelson, but the defining economic narrative of recent decades, and the product of an immensely damaging transfer of wealth from the poorest to the richest.

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