their counterparts in competitor nations, while the American CEOs are paid at least twice (compared to the Swiss managers, excluding stock options) and possibly up to twenty times (compared to the Japanese managers, including stock options) that of what their counterparts in comparable countries are paid. Despite this, the American CEOs are running companies that are no better, and frequently worse, than their Japanese or European competitors.
In the US (and the UK, which has the second highest CEO– worker pay ratio after the US), the compensation packages for top managers are loaded in one way. Apart from being paid excessive amounts, these managers do not get punished for bad management. The most that will happen to them is to be kicked out of their current job, but that will almost always be accompanied by a fat severance payment cheque. Sometimes the expelled CEO will get even more than what is required in the contract. According to two economists, Bebchuk and Fried, ‘when Mattel CEO Jill Barad resigned under fire [in 2000], the board forgave a $4.2 million loan, gave her an additional $3.3 million in cash to cover the taxes for forgiveness of another loan and allowed her unvested options to vest automatically. These gratuitous benefits were in addition to the considerable benefits that she received under her employment agreement, which included a termination payment of $26.4 million and a stream of retirement benefits exceeding $700,000 per year.’[6]
Should we care? Not really, free-market economists would argue. If some companies are stupid enough to pay gratuitous benefits to failed CEOs, they would say, let them do it. They will be outcompeted by more hard- nosed competitors that do not engage in such nonsense. So, even though there may be some poorly designed compensation schemes around, they will eventually be eliminated through competitive pressures of the market.
This seems plausible. The competitive process works to eliminate inefficient practices, be they obsolete textile technologies or biased executive pay schemes. And the fact that American and British companies have been losing to foreign companies, which on the whole have better managerial incentives, is a proof of it.
However, it will take a long time for this process to eliminate wrong managerial compensation practices (after all, this has been going on for decades). Before its recent bankruptcy, people had known for at least three decades that GM was on a decline, but no one did anything to stop the top managers from receiving compensation packages more fitting to their predecessors in the mid twentieth century, when the company had absolute dominance worldwide (
Despite this, little is done to check excessive and biased (in that failures are hardly punished) executive pay packages because the managerial classes in the US and Britain have become so powerful, not least because of the fat paycheques they have been getting over the last few decades. They have come to control the boardrooms, through interlocking directorship and manipulation of information that they provide to independent directors, and as a result few boards of directors question the level and the structure of executive pay set by the CEO. High and rising dividend payments also keep the shareholders happy (
The power of this managerial class has been most vividly demonstrated by the aftermath of the 2008 financial crisis. When the American and the British governments injected astronomical sums of taxpayers’ money into troubled financial institutions in the autumn of 2008, few of the managers who were responsible for their institution’s failure were punished. Yes, a small number of CEOs have lost their jobs, but few of those who have remained in their jobs have taken a serious pay cut and there has been an enormous, and effective, resistance to the attempt by the US Congress to put a cap on pay of the managers of financial firms receiving taxpayers’ money. The British government refused to do anything about the ?15–20 million pensions payout (which gives him around ?700,000 yearly income) to the disgraced former boss of the RBS (Royal Bank of Scotland), Sir Fred Goodwin, although the intense negative publicity forced him subsequently to return ?4 million. The fact that the British and the American taxpayers, who have become the shareholders of the bailed-out financial institutions, cannot even punish their now-employees for poor performance and force them to accept a more efficient compensation scheme shows the extent of power that the managerial class now possesses in these countries.
Markets weed out inefficient practices, but only when no one has sufficient power to manipulate them. Moreover, even if they are eventually weeded out, one-sided managerial compensation packages impose huge costs on the rest of the economy while they last. The workers have to be constantly squeezed through downward pressure on wages, casualization of employment and permanent downsizing, so that the managers can generate enough extra profits to distribute to the shareholders and keep them from raising issues with high executive pay (for more on this,
When the managerial classes in the US and, to a lesser extent Britain, possess such economic, political and ideological power that they can manipulate the market and pass on the negative consequences of their actions to other people, it is an illusion to think that executive pay is something whose optimal levels and structures are going to be, and should be, determined by the market.
Thing 15
People in poor countries are more
entrepreneurial than people in rich countries
Entrepreneurship is at the heart of economic dynamism. Unless there are entrepreneurs who seek out new money-making opportunities by generating new products and meeting unmet demands, the economy cannot develop. Indeed, one of the reasons behind the lack of economic dynamism in a range of countries, from France to all those states in the developing world, is the lack of entrepreneurship. Unless all those people who aimlessly loiter around in poor countries change their attitudes and actively seek out profit-making opportunities, their countries are not going to develop.
People who live in poor countries have to be very entrepreneurial even just to survive. For every loiterer in a developing country, you have two or three children shining shoes and four or five people hawking things. What makes the poor countries poor is not the absence of entrepreneurial energy at the personal level, but the absence of productive technologies and developed social organizations, especially modern firms. The increasingly apparent problems with microcredit – very small loans given to poor people in developing countries with the pronounced aim of helping them set up businesses – shows the limitations of individual entrepreneurship. Especially in the last century, entrepreneurship has become a collective activity, so the poverty of collective organization has become an even bigger obstacle to economic development rather than the deficient entrepreneurial spirits of individuals.
George W. Bush, the former US president, is reputed to have complained that the problem with the French is that they do not have a word for entrepreneurship in their language. His French may not have been up to scratch, but Mr Bush was articulating a fairly common Anglo-American prejudice against France as an un-dynamic and backward-looking country full of lazy workers, sheep-burning farmers, pretentious left-wing intellectuals, meddling bureaucrats and, last but not least, pompous waiters.
Whether or not Mr Bush’s conception of France is right (more on this later, and
