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.
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.
32 Responses to “Fraser Nelson is wrong about the deserving rich”
blarg1987
1. The regulations have been changed. It is no longer cost effective to provide final salary schemes.
If that is the case then why do CEO’s and people very high up in many private comapnies have very generous pension packets while those further down do not if it is not “cost efective”. Naything that costs a private company mpney that is profit taken away form shareholders is not going to be cost effective even providing a pension.
I accept that botth political parties should not have taxed pension pots, but also many private companies were at fault for taking pension holidays as well.
Back to the origional point, of this debate do you think CEO’s deserve the pay they do for simply putting in policies that kpost people can think of and so are not really that innovative?
blarg1987
Well the ones I know which are funded through employment contributions whch go to but assets are local authority and teacher pensions.
Police pensions they do pay a large amount towards (up to 15%) and believe this is also invested.
I can not comment on civil service, armed forces or NHS pensions.
OldLb
Because they are looking after themselves. Wake up!
Now wake up. What do you think the state is doing to the poor? Yep, screwing them even more.
At least most CEOs are providing cash so people can invest in assets.
ie. Look at the assets held by pension funds run by the CEO’s you criticise. Look at the assets held by individuals in Money Purchase schemes.
Now tell us again how much the state owes? 6.500 bn
What assets does it have booked against those debts? Ah yes, the only number we know with certainty is that its zero.
[The fully funded with black holes pensions schemes not included in the above. MP’s pensions for example]
blarg1987
I am wide awake thank you, and what you mean fully funded schemes with blakc holes? If your referring to schemes which currently face a funding shortfall, these are schemes whereby by public and private pension fund managers have said the shortfall is down to the current economic climate and it is expected to return to normal later on.
Unless you are admitting the idea that NI contributions invested on the FTSE (which public and private pensions are) has black holes in which case you have admitted your idea would also have shortfalls in it.
I also see CEO’s screwing over people with oh thanks for your loyal service we are closing down your pension giving you a money purchase shceme and with the money saved awarding ourselves a bonus.
This is what the above debate is about and is focused on. SO either engage in this debate by either supporting the idea that the article does that some CEO’s are only stewards of industry and maybe should not be awarded the pay they are on. Or giving a logical justifiable reason why CEO’s should be paid what they are.
Ross
I don’t understand why it has to be either, or… just because some bank managers are good at their job doesn’t mean there is not a serious economic and ethical crisis in banking (one which even FT pundits refer to). Similarly just because CEOs may or may not be over-paid does not mean that we can come to a conclusion on whether or not the last two governments have squandered taxes. Both are in fact true and what’s more, they are directly linked in most EU countries. If we scale up to a Europe wide debate you can see most major European banks (and some US banks) have been involved in lending massive unjustifiable sums to local councils e.g. the Italian councils that have gone bankrupt over the last year or so – not only does this demonstrate that managerial risk taking went too far, it also demonstrates that local government is economically incompetent in many EU countries. So if you want to e.g. blame public sector unions for council overspends, we could look at why such generous pensions were offered – 1) Banks specifically set up sales departments which targeted naive local council officials for ‘rate-swaps’, there by providing the immediate liquidity required for them to overspend in the short term 2) Unions new this and also new that there was a pay disparity between many public sector jobs and equivalent private jobs e.g. private vs. public medical professionals, so traded wages for pension rights and better shift patterns in their negotiations. I always find it strange how people want to apply free market principles to trade and commerce but then ascribe some mystical evil quality to ‘the state’ employees as if it runs by some other economic principles than a corporation’s. The reason why the NHS is sucking funds out of our tax pot and into doctors salaries and pensions is not because ‘it would be better done by business’ – it’s because it is running exactly like a PFI where the doctors are the employee and the shareholder rolled into one, where as some other manager or civil servant is running HR and finance. This is why Adam Smith asserted that complete separation of management of any organisation from its ownership would lead to disaster for a free market (as is the case in the aforementioned banks) – and I would rather trust his definition of free market, than your half baked attempt based on some resentment of public sector workers’ ability to negotiate improved terms along with some vague concept of the evil state. A system of governance run by corporations would be little different given the cross pollination of ideas between the two.