Saturday, 4 February 2012

Quick notes on executive pay

A short list of 'issues' in setting pay and rating performance:

1) Causal relationship. To what extent were gains due to leadership, vs:

i) general price movements
ii) shocks and macroeconomic events / policy
iii) market environment
iv) leverage
v) unrelated productivity boosts (such as by employees and initiatives below senior level)
vi) luck / variability / direction of long term economic cycles / factory fires and gremlin infestations.
vii) technological / systems improvement of universal character, not specific to the leadership of one firm.
viii) other

2) Medium to Long term fungibility.

i) to what degree, as per causality above, are the skills involved proven to be valuable? And thus hard to replace.
ii) to what extent does market concentration reduce the total stock of people with the necessary experience to take on such a position?
iii) is there sufficient scrutiny to ensure that difficulty replacing individual does not allow for dangerous risk-taking?

3) International competition.

i) What alternatives are there for motivating good, high skill work besides pecuniary remunation?
ii) To what extent would individuals wish to relocate elsewhere on the basis of pleasure derived from living in this country / difficulty involved in living elsewhere?
iii) How replacable are they, taking account of a rigorous examination of all factors, including relevant scientific studies?
iv) To what extent can / should taxation be tightened up to reduce tax avoidance etc?
v) To what extent can international agreements be reached on this point?

Finally, there is a serious question, in the longer term, about the degree to which national democracy should be hampered by the petulance of the wealthy few in industries which we may not wish to be dependent on more generally. If doctors threaten to leave, we have a problem. Whereas those running RBS could have been replaced with a media studies undergrad and potentially have had less damaging consequences for the economy.

The issue of concentration is enormous, though only briefly mentioned. A small number of firms dominating a market will mean fewer experienced individuals to choose from, and greater payments toward them. Small banks are less convenient and can cause a crisis just as easily as large banks, but the competition does have many healthy effects, and letting any single one fail is a great deal easier. The UK and US markets are extremely concentrated as a rule, and this is very broadly true, in many cases it is bad for consumers and producers.

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