I’m intensely relaxed about people getting filthy rich

The LSE has released a study on what the executive search industry thinks of the pay packages and competency of top CEOs. Its findings tell an increasingly familiar story.

Firstly, the study’s authors conclude that there was almost universal agreement” that CEO pay was “absurdly high”. The average annual remuneration for a FTSE 100 CEO is now £4.6m, well over a hundred times the average employee pay package.

Secondly, search firms think those holding these posts are not the best and brightest.

This is pressingly relevant because the arguments for greater economic inequality in the workplace — that wages reflect marginal productivity and inequality provides an incentive to work — are clearly breaking down, if they were ever valid.

We’ve been trying to do something about this problem for a while, and have known about it for even longer. As a paper in our corporate governance issue put it: “pay has grown much beyond the increase that could be explained by changes in firm size, performance, and industry classification” — that was in 2005 and pay has only continued to rise.

So what is to be done? The answer probably doesn’t lie in greater pay restraint, as the LSE found that signaling for higher remuneration is an optimal strategy. Nor in venturing further into the theoretical cul-de-sac of marginal productivity theory (the authors found “the general view of search firms is that a lower norm would not materially affect what happens”).

A start would be to realise that moral indignation belies the complexity of policy responses to pay issues, and the depth to which the assumptions of the past are ingrained in our intellectual psyche.

This is as much a political problem as it is one of economic theory.

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