Big egos inflate executive pay, not markets

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When genuine market operations are absent executive pay is seen as a measure of value rather than just a financial reward

When Jean-Pierre Garnier was asked why he needed to be paid so much, he said the answer was market forces. Following the humiliating defeat of their remuneration report by shareholders, the directors of GlaxoSmithKline have a chance to test that hypothesis.

They could advertise the job of chief executive at a relatively modest fixed salary – say $500,000 a year. I will bet they would attract many well qualified applicants. Many people in number two or three slots at other companies would happily take a salary cut to get a chance at the top.

Although George W. Bush is the first US president with an MBA, he would probably not make GSK’s shortlist. But whatever the shortcomings of candidates for America’s highest office, it is unlikely the low salary is to blame.

Other important jobs are filled at salaries a senior executive would scoff at. Jobs such as chairman of the Federal Reserve Board, prime minister of Great Britain and Pope offer less than $500,000 a year. Yet talented people fight fiercely to get them.

This is not surprising. They are good jobs. Their holders enjoy great prestige and have the opportunity to leave their footsteps in the sands of time. The buzz of power, the pleasure in the job are more important motivations than financial reward. And we want these positions filled by people who respond in that way. There are some US corporate lawyers who might say: “I was offered the post of Chief Justice of the Supreme Court but I turned it down. I was thinking of you and the kids. We might have had to sell the second yacht.” But they are probably not the right candidates for the job.

Other positions attract multi-million-dollar packages – America’s number one golf professional, author of the Harry Potter novels. If you were to advertise these slots, you would also have many strong candidates. But the incongruity of the suggestion demonstrates the difference. Being America’s leading golfer or a successful writer is not a post but an achievement. Tiger Woods and J.K. Rowling have unique talents. Objective measures – the scores, the sales of the novels – demonstrate that they are not just good, but better than anyone else.

That is not true of Mr Garnier. His talents and achievements, while no doubt considerable, are not markedly different from those of a thousand other people. Tiger Woods and J.K. Rowling won their positions themselves and their earnings genuinely result from a market process. The chief executive of GSK is identified by a search committee and his earnings set by a remuneration committee. Committees are the hallmark of hierarchy, not markets.

What Mr Garnier really means when he talks of market forces is that others who occupy similar positions are paid more. Huge remuneration packages have become prized, not just for the money but for their role in reinforcing the recipients’ already elevated conceptions of their own value. It does not seem to cause Alan Greenspan, the Fed chairman, much social embarrassment that, with his salary of about $170,000, he is paid so much less than the denizens of Wall Street who wait on his every word, but then Mr Greenspan is very good at his job. People less sure of themselves need a bulging pay packet as reassurance that they really are as important as they think.

Chauffeured limousines and corporate jets are the most prized of executive perks, because they isolate their occupants from the ordinary world of subways and check-in queues. Within this closed environment, there has been little understanding of the resentment that the explosion of executive remuneration has caused outside companies – and within them.

In a way it is fitting that GSK should be the first company to feel the backlash. The individual achievements of GSK employees have made a dramatic difference to the fortunes of the company and the world outside it. These people are not in its boardroom but in its laboratories, and they have worked for relatively modest salaries. Their overriding motivation is the satisfaction of the job, rather than bonuses and options. It would help maintain that outcome if the same were true at the top.

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