Because you’re worth it
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In his new book, The Trouble with Markets, Roger Bootle sets out to save capitalism from itself and it’s possible that this might just happen, so long as everyone accepts his analysis and his pearls of wisdom.
That said, the book is an interesting journey into the causes of what he calls the Great Implosion, though the section on why bankers earn so much money might raise heckles in the executive suites of banks and building societies around the country.
For example, as his starting point Bootle dismisses the idea that their pay mirrors the input of effort and talent. “This suggestion is so outrageous as to be risible”, he declares.
He refutes the idea that senior executive pay is determined as a market process. Rather, the way that remuneration committees and consultants work, together with the practice of working within acceptable ranges for particular jobs, and the scales of the profits possible in a low-competition environment, all aid and abet inflating the reward package.
Citing research by Cornell University in the US, he reports: “In 1965 the ratio of average total CEO compensation to that of the average worker was 24:1. Forty years later it stood at 262:1.”
How is this trend reflected in UK financial institutions? The mathematics is simple. It’s just a matter of dividing the average salary of the workforce by the chief executive’s salary and on that basis the ratio for building society chief executives is lower than for the CEOs of the big banks and obviously the hedge funds. In fact it is probably closer to the US ratio of 24:1 that prevailed back in 1965.
However even that figure looks a bit on the high side when benchmarked against the remuneration structure at the Ecology Building Society which works on a ration of 5:1 with the figure one representing not the average salary but the lowest salary.
Hair shirt stuff, you may say, but as a building society which has sustainability as its core value, that’s the business model that it’s chosen.
I’m not saying that this is right or wrong. There’s an argument that CEOs of small societies have to run that much harder than their counterparts at Nationwide, Yorkshire and Coventry because they haven’t got the big infrastructures to support them and they should be rewarded accordingly.
There’s also a case for saying that there should be a relationship between the pay package of the senior executives and the profits that a business generates but here it gets interesting
Last year The Ecology generated bigger profits than the much larger Chelsea and Stroud & Swindon where, of course, the CEOs paid the ultimate price for failure.
However, there are many other examples where societies under performed and where the CEOs were earning more than five times that paid to the top man at the Ecology.
The situation becomes even odder when profits generated by the business are lower than the pay package of the chief executive. True, we are living in extraordinary time, but isn’t that an extraordinary situation?
