Britain Looks to Address Inequality with Executive Pay Measures | Hacker News Reader

Britain Looks to Address Inequality with Executive Pay Measures

nytimes.com

38 pointschollida166 comments

JFC.... In the late 1970s, the US FTC was worried about rising executive pay. So they pioneered similar 'transparency' requirements, forcing publicly traded companies to reveal the compensation of their executives.

Do you know what the result was? MASSIVE increases in executive pay. Rather than shaming companies by making them admit to paying their executives hundreds or thousands of times more than they pay their average employees who are actually creating all of the companies value, they turned executive compensation into a signal to investors of corporate health. 'Would that company be able to pay their CEO $650 million a year if it was failing? Of course not!'

This move in Britain appears to be nothing more than an attempt to radically amplify economic inequality, not reduce it. And it will succeed at that as well as it succeeded in the US.

The employees are hired out to do the job. If it really was the case that the average employees talents were so rare, then they would be making much more. See for example deep learning and self driving car company "average" employees

Are you under the impression that executives are not employees? Or that the "talents" of executives are rare?

And no, the rarity nor value of the employees skills matter, and hasn't for quite awhile now (since at least the 1980s). The view you depict is the 'free market' one, where profit always rapidly decreases to zero based upon rational competition. Tell me, do you see many companies with profit margins rapidly approaching zero?

> Tell me, do you see many companies with profit margins rapidly approaching zero?

Many of the companies that were in a field which Amazon entered

> In the late 1970s, the US FTC was worried about rising executive pay. So they pioneered similar 'transparency' requirements, forcing publicly traded companies to reveal the compensation of their executives.

I think you mean “early 1990s” and “SEC”, not “late 1970s” and “FTC”.

You are right, it was the SEC rather than FTC, my bad. But no, it was the late 1970s, not the 1990s.

There was clearly an SEC change for transparency of executive compensation that was driven by concerns of rising inequality in the early 1990s; I can't find anything about one in the late 1970s with that as a motivation, and it seems improbable, because through the 1970s the slow compression of wages following the 1940s “Great Compression” was still continuing, and significant rising inequality took into the 1980s to take off, and wasn't generally a concern of policymakers or in the political sphere in any significant way until the 1990-1991 recession.

I can't find the citation right now, but I remember reading that a European country required all gas stations to report their price to a government database, so that consumers could easily price compare.

It caused prices to go up, since now the gas station can easily see he doesn't really need to compete much, so they just barely went lower then their neighbor. After a few cycles of that prices ended up higher.

It's always humbling to learn about economic policies that have backfired. Another one is capping wages in the US during WWII: companies compensated employees other ways which popularized employer-subsidized insurance.

> Do you know what the result was? MASSIVE increases in executive pay.

That's not what massively increased executive pay. The stock market boom - starting from the early 1980s and accelerating in the mid 1990s to now - is what generated the hyper spike in executive compensation. You can directly trace all big increases and drops in executive compensation, going back 50 years, with the S&P 500's movements.

Jul 1964 to Apr 1982, the S&P 500 went from 84 to 109. Call it 30% over 17 years. Read that again and again until it sinks in.

From Apr 1982 to Oct 1993 it went from 109 to 466. Call it near 300% in 11 years.

From Oct 1993 to today, 24 years, it has gone from 466 to 2457.

The only reason executive compensation has soared so dramatically, is because so much of it is tied to stock compensation.

If we're talking base salary, the NBA's total league roster (~450 players) earns as much as all Fortune 500 CEOs combined.

This is a much better factually supported hypothesis than it's parent post.

I find it silly that transparency alone would cause pay raises or gas price increases.

Better ideas would be an Executive tax.. -- if you make more than 120 times the average American salary from a single company, anything above that is taxed at 100%.

One test I have always applied when looking at joining a company is "do the majority of managers, including C level execs have an employee who makes more than them."

In the well run tech companies I've worked at, the programmers tended to make more money than their managers, which I find to be a good sign.

Ditto for almost all hedge funds I've seen, though to a much larger extreme, those who produce the value get the largest paycheck regardless of their pecking order. though to be fair the huge hedge funds buck this trend by making soooo much money and having a single person own the management company that the fund pays the management and performance fees into.

It doesn't help with measuring the ratio of the lowest paycheck to the highest, but it does help ensure that people get paid based on what they produce rather than their title.

But I find its a good question to ask when interviewing. Find the manager and ask how many of his/her reports make more than them. If you get squirming or push back about a top down approach with salaries that follow the same logic, then you've got a decent data point that you won't be all that valued at the company.

How exactly do you go about finding that out? Just during interviews?

What's the incentive to go into management if you get paid less?

By management I don't mean product/project management, I mean general & strategic leadership of a large organisation.

Maybe the person who is paid more has higher skills. The manager could be average and person the manage a star performer.

If you enjoy it, that's a good incentive. Organizations that overpay managers in order to entice ICs to take up less productive management work are shooting themselves in the foot.

What's the incentive to go into management if you get paid less?

One organisation I worked for had a very elaborate grade system, I was a Grade 20, the highest non-management grade. At that level you had a choice: try to get promoted to Grade 21 at which you would officially be management, but you would lose your overtime pay, and it wasn't until Grade 25 at least that it would be financially worthwhile. Or you could divert your efforts into avoiding getting promoted... Guess what the majority of engineers did?

The guy I reported to there however embraced the promotion. He loved "being a manager". He loved the attache case, he loved going over the minutes of meetings, he loved pre-meetings to plan the next meeting, he loved travelling to attend more meetings... It takes all sorts I guess. He was an unremarkable engineer before, and he wasn't any good at actually managing either tho'!

Just an extension to your post...

I sold and retired but I used to get shocked looks when I revealed that some of my employees earned a higher wage than I did. Basically, I paid myself a reasonable salary and paid other people to do things that I could not.

On the whole, I think this fostered a good work environment. There was a physically demonstrable level of respect. Salaries weren't ever really hidden, so it was almost certainly a motivator/morale boost when crunch times came. I paid myself enough and, for the most part, just kept pushing funds back into growth and a nest egg. I also kept the business as a separate entity.

To give an example, this was the early 1990s and quality programmers weren't easy to find. New hires started in the six figure range, unadjusted dollars. As an aside, it's notable that folks tell me that wages haven't really improved and, in sme cases, have declined.

Anyhow, the gist of this post is that showing respect earns you respect. Granted, the company never expanded beyond 250 people and I haven't actually ever taken a business class. So, I guess this is largely anecdotal.

While I do believe that inequality is one of the biggest, if not the biggest, issue in modern developed nations, isn't the rise of the inequality largely due to accumulation of wealth, and not income amongst the richest?

I see a lot of ire being targeted towards people making close to a million, and while the 1% makes for a good slogan, I believe the real problem is actually the 0.1 - 0.01% whose wealth has skyrocketed. And you don't reach the 0.1% with executive pay, but rather due to making money on existing capital.

Wasn't Picketty's research evidence that the problem isn't income, but rather accumulated wealth?

It is, but any measure to reverse-tax and redistribute wealth is a non-starter anywhere in the US, even the most left-learning states and municipalities.

So yes, that's the cause, but it's unlikely anything will ever be done about it.

This is really prescient. It's not the "pay" but the capital gains. And something like a very minimal transaction tax would probably do far more to address inequality.

By focusing on people rather than the financial instruments, the politicians can be seen to do something (which is guaranteed to not fix the problem fundamentally).

The chances of this acutally becoming law are fairly small.

Firstly, most of the ruling party (Tories) are rabidly "pro buisness" which translates to sounding tough on anything that could be twisted into "red tape".

Secondly, this is an attempt to steal thunder from the current opposition party, who are currently in disarray.

Thirdly, and most importantly, there is simply not enough time for this to be implemented fully.

* Britain Looks to Address jealousy with Executive Pay Measures

A few executives making large salaries is not an actual issue.

It is an actual issue. Distribution of wealth affects the strength of the economy. The more wealth you spread out amongst the many, the faster your economy is likely to grow. It's the working class and middle class that are the major driving force in an economy (including job creation), not the rich.

You've been lied to. Growth comes primarily from investment in science, technology, and other areas of innovation. The wealthy are much more likely to invest in these than the middle class because they have money to spare. The middle class is primarily a consumption class, not an investment class.

> "Growth comes primarily from investment in science, technology, and other areas of innovation."

No, it doesn't. It's quite simple, none of those advances in science and technology mean a damn to the economy if there's no consumers buying new products. A working class person is much more likely to spend £1000 into the economy faster than a rich person, mainly because their needs are more immediate. Spreading wealth around leads to a broader base of consumers and a healthier economy. Also, it's quite clear that the opposite (trickle-down economics) has been a dismal failure.

Ok, so now we have a bunch of companies selling soda to end consumers, instead of risky startup in unproven fields which may lead to large changes in our world.

Consumer tech is still a thing. You're almost certainly using a consumer tech device right now. As for R&D, there's little evidence that suggests the wealthiest amongst us are the biggest risk takers. One of the reasons people like Elon Musk get a lot of media coverage is because he breaks the mould, he's a wealthy individual taking big risks to better our world. There aren't that many people like him around. Even venture capital investors, who are (by reputation) open to risk, tend to stick to the safe bets.

> new products

Research & innovation create new product categories. No amount of consumer spending invents new products.

I disagree with you that consumer spending boosts the economy. Look at the actions of central banks easing monetary conditions to try and boost spending. All they do is succeed in inflating bubbles that later produce busts.

Economic growth is a subject not completely understood by economists. Is is savings or investment? How does regulatory burden come into play? What about property rights and government corruption?

> "Research & innovation create new product categories. No amount of consumer spending invents new products."

Potential consumer spending does create the space for new products.

Take VR as an example. The recent resurgence in VR has been made possible by the disposable income of gamers, especially PC gamers. Look at the high amounts of money being spent by gamers. If that disposable income did not exist, the resurgence of VR would look very different, and products like the Vive and the Rift are unlikely to have emerged.

As for whether consumer spending drives scientific research, depends on what you class as consumer spending. For example, do you class student loans as consumer spending? Do you class government taxes as consumer spending? I'd suggest that funding from a diverse group of people is more reliable than hoping a handful of rich people do the right thing.

This makes no sense. You're saying the rich invest their spare cash into science and tech? That's not at all true, the rich invest into areas that provide returns on their investments, that's how they got rich and how they stay rich.

...which has heavily included science and technology. At least for the past 40 years.

...along with thousands of other categories

Luckily we don't have to guess about this. We aggressively cut taxes on the richest in the US for all of the 80s and 90s. They did not invest in science, technology, or any area of innovation. They did not create more jobs. They invested solely in the financial services sector, and the money remains locked up in there still.

Are you sure it isn't getting at the low hanging fruit in education and health care?

Is it hard to believe that economic growth is a really complex topic? That distribution of wealth does not necessarily inhibit nor stimulate economic growth? That a lot depends on a lot of factors and it's impossible to run controlled experiments on economies because no two economies, cultures, and governments are the same?

On one level all models are wrong, but not all models are equally wrong.

Let's use a hypothetical example. Imagine I'm a car salesman, and I move to a new town with 10,000 people. Am I likely to be better off if 1% of that population can afford to buy a car or 10% of that population can afford to buy a car?

10%, sure. But are you any worse off if, out of those 10%, 1% can afford a private jet?

> A few executives making large salaries is not an actual issue.

Do you have a citation for this? Because Capital in the Twenty-First Century showed, with a boatload of empirical data behind it, that "superstar salaries" are one of the main drivers of inequality at present (it's a key difference between the inequality now and that of previous centuries - earlier, we had inequality of wealth and now we have inequality of income)

Economic inequality is the sole reliable predictor of a high level of violent crime in a society. Thousands of different indicators have been examined, and economic inequality is literally the only one that correlates significantly with violent crime rates. And that's before you even get into the principles of the matter. If capitalism is supposed to be based upon people being paid relative to the value they actually create, outsized executive pay clearly betrays that standard utterly. While a small number of people could replace a business analyst who knows the operations of the business inside and out, almost anyone could do the job of a CEO who shows up and is gone within 3 years, off to a new company, serving as nothing more than temporary figurehead and whose primary actual job duty is to cash large checks so investors think the company is healthy.

I'd like to see a source, but I'm willing to bet even if you're able to find it, is a comparison of US vs various European countries. I'm willing to bet it's non exhaustive and excludes all sorts of countries in South America, Africa, Middle East, and Asia...

You're precisely wrong, actually. The source I would quote is unfortunately a dead-tree book, specifically the first chapter of the book 'Nine Crazy Ideas In Science'. The first chapter isn't even ABOUT economic inequality, but actually about the 'crazy idea' that tons of guns in a society could lead to less violent crime. The only actually sensible thing to do, of course, is to study EVERY society and not to cherry pick 'oh we'll only look at the developed countries and then claim to have found something about human society in general'. You look at all of them. And when looking at all of them, prevalence of gun ownership in a society had no correlation with violent crime. Not positive, not negative. So they threw in a thousand+ other demographic factors and couldn't find a single one that was a statistically significant predictor... except economic inequality. Poverty itself wasn't predictive, wealth itself wasn't predictive, only a presence of both poverty and wealth together was predictive, with the extremity of the gap predictive of the severity of the violent crime.

One thing I am uncertian of is how exactly they defined 'violent crime'. Most people only consider street crime when addressing the issue. But most death from crime is due to white collar crime. White collar crime (at least in the US) kills more people and causes more economic damage than street crime by a large margin (but is socially normalized among the upper class so rarely punished, and then only lightly).

Correlation, we all know, does not equal causation. On guns and inequality. Doesn't matter if there is a statistical correlation or not. It proves nothing.

For certain societies, banning guns might lower crime. For others, it might increase it. There's lots of complex factors in any society that can influence whether certain economic or legal policies are taken.

For example, a country with a strong militaristic culture and a law for drafting all of its citizens to the army, might have lower crime despite the prevalence of legal gun owners. All sorts of possible reasons for this.

Likewise, an island nation with strong border protection could ban guns altogether and probably see a drop in murders. It's all possible.

Societies are complex and woven with history, traditions, sub-cultures, economics, politics, and natural inclinations that can all influence the outcome of any policy for better or worse.

Over the past 25 years in the US inequality has gone up while violent crime has dropped.

> Economic inequality is the sole reliable predictor of a high level of violent crime in a society.

It might have dropped but it's still "a high level" - 10,000 gun deaths thus far in 2017 would indicate that.

http://www.gunviolencearchive.org/

If reducing violent crime is the goal, there are of course many ways you can accomplish that. We should also weigh it against other goals like freedom from excessive tax rates.

But as far as solving violent crime through egalitarianism, focusing on executive pay (which is a tiny fraction of the population) seems misguided. Its too small a number of people to have a noticeable affect on violent crime.

This seems to mostly solve jealousy more than anything else.

Then why do big businesses pay out the big bucks to CEOs?

If it is basically CEOs and their board conning money out of the company, won't companies that don't engage in that kind of behavior have a competitive advantage and eventually overtake the poorly led companies?

It's basically conning, and yes it hurts the companies but for public companies it doesn't matter because that's the incentives of the board/CEO are out of whack. Shareholders aren't allowed to elect boards in public companies so they become interlocked with insiders.

And in reality a good CEO is worth an enormous amount of money so the actual amount that is earned and the excess that is grift is difficult to measure.

Do you have a source? This seems wrong.

Presence of internal or external conflict seems to be the largest driver of violence.

Page 29: http://economicsandpeace.org/wp-content/uploads/2016/06/GPI-...

Completely agree. However, controlling take-home pay seems a bit like shutting the barn door after the horses have bolted.

What should really be done is to institute a financial transaction tax that both suppresses pure speculation and taxes actual wealth generation given the largest component of take-home pay for CEOs is stock.

Especially in private companies.

Can we make sure that the royal family, which is essentially a corporation (in fact, the queen calls her family "the corporation") is subject to the same rules, and they don't hide their payouts and tax breaks behind opaque special case rules just for themselves.

They should figure a way for a shareholder vote to determine pay levels. I've got shares and wouldn't vote for the managers to get stupid high pay. At the moment the managers effectively choose their own salaries hence the excesses. It is, theoretically at any rate, us shareholder's money.

Remuneration of executive is up for approval at AGM in many countries. So you probably can vote. You can also check the vote results, the majority of shareholders vote to approve the remuneration packages.

Isn't this capitalism working exactly as intended?

That depends. Do you mean free market capitalism or crony capitalism?

To decide whether this is what free market capitalism intends, we'd have to determine if their wages are large due to free market forces (e.g supply and demand, etc) or if there is some government collusion going on inflating their wages.

there's not a difference.

There is actually a pretty clear distinction. Here is one persons explanation if you want to inform yourself.

http://www.thedailybell.com/editorials/richard-ebeling-free-...

What sort of collusion would increase their wages?

lobbying/bribing for laws intended to limit competition is the most common weapon of choice.

But that wouldn't affect the ratio of employee wage to executive wage. Lobbying/bribing would increase the company's total profit.

Executives are often paid (or given raises) in-part or in-whole relative to the companies total profit.

Typical employees are not.

Exactly, capitalism working as intended.

You say that as if it's a bad thing. A company is not a communist-commune where everyone owns the "commune" collectively. The executives' compensation is based on the company performance because they probably own shares and because their specific "function" is to make the company perform better.

An employee's function, on the other hand, is to do their "task". They get paid to do it. Now, you could argue that if they do their task well, then the company does well as well, but that's not the way the relationship is presented. It's more transactional in nature, because it's easy to quantify the value being exchanged.

Because of the hysteria over "raiders" public companies have been able to prohibit shareholders from electing their own board slates, which has led to boards packed with insiders who collude to raise their and the CEO's compensation.

CEOs pick board members, and board members decide their salaries. Further, board members tend to be other CEOs so it's in all of their interests to inflate CEO salary.

That would be the collusion, although I think it's less collusion, and more a misalignment of interests that lead to a negative outcome.

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