Shareholders no better than greedy execs

Corporate failings over the past 18 months would have been a lot worse if the senior corporate executives hadn’t been doing such a good job while at the helm. The absurdity of this argument underlines the absurdity of the Federal Government’s key justification for the economic stimulus package, which has failed to prevent the economy sliding into recession.

In relation to any policy or practice the only measure is whether it is delivering objectively desirable outcomes given the nature of the institution in question. It is nonsense to try to justify the practice by reference to an unknown parallel world which does not exist.

And it is on this basis that high executive remuneration is not as indecent as current sentiment indicates.

To understand the reason for this, it is necessary to understand the reason for the hefty pay packets of company heavy weights. Accountability and responsibility is severed when you decouple decisions about payment from ownership. Individuals generally make prudent, rational decisions about their expenditure because the money is coming from their pockets. That’s why people employed by sole traders or partnerships never get paid above the odds. OK, law firm partners often get paid over the $1 million mark, but that is only because they personally generate at least twice this amount.

When it comes to setting corporate salaries, it’s a free for all because the money comes from the shareholders who are effectively excluded from the salary determination process. It is a luxurious position for company executives to be in, knowing that nobody who has a direct interest in the money they will be milking sets their pay.

It is for that very reason that public companies are a dream when it comes to providing services. The people awarding the contracts aren’t paying out of their pockets and have no direct stake in getting value for money. Thus, law firms and other service providers champ at the bit to act for the large corporates. The same applies in relation to government work.

A fundamental constant in life is that all human action is referable to one of six desires: power, fame (i.e., status), love (including loyalty), fear, sex and money. Fame, love and sex (Friday drinks aside) are absent in the corporate setting, but there is plenty scope for the pursuit for money and power.

Thus, given that the owners of the money don’t have direct control in decisions relating to how their money is spent much, it is inevitable that corporate executives are going to award themselves large salaries. But are they above the odds?

This requires an assessment of the worth of human labour. From a functionality and utility perspective of human activity, the people that rate the highest are those who provide others with the necessities of life. In descending order, these are health, food, security, shelter and education.

Thus doctors, farmers, police, builders and teachers should be at the top of the pay mountain.

Yet, there are other elements to the pay matrix. One of them is supply and demand economics and the desire by consumers to make their money go as far as possible.

Teachers, builders and even doctors aren’t paid over the odds simply because there are lots of them and market forces drive down the amount they can charge for their services. The reason why there are lots of these types of professionals comes down to one or more of the six motivators for human action. Thus, people often become doctors and teachers because they think it will give them status and it is the best way for them to make money consistent with their interests and skills.