Please click on the link below to watch my evidence on finance sector remuneration for the Parliamentary Commission on Banking Standards
Please click below to see an interview with me for Economist Education on managing teams across borders
Please click on the link below to watch my appearance on CNBC when I discussed my book “Pay Check”
Merryn Somerset Webb, editor-in-chief of MoneyWeek, has written a review of Pay Check, an updated version of which has just been published.
An updated edition of my book “Pay Check: Are Top Earners Really Worth It?” is now out. With an afterword examining how the debate has progressed in the last two years, the book explains:
- Why high pay must be confronted if popular faith in the system is to be restored.
- Why the current mantra attacking “rewards for failure” is misguided; individuals should not even be rewarded for corporate success.
- Why taxation, regulation and other forms of state intervention will be successfully sidestepped.
- Why only the successful dismantling of the talent myth will bring pay to more rational levels; progress is being made here – there is clear evidence that top earners and their allies are losing confidence in their hollow justifications.
An interesting quote from Lord Adair Turner, the chairman of the Financial Services Authority, about the Royal Bank of Scotland. He explains why senior executives at the bank were not personally culpable for its demise.
“We can’t pursue a case that says “the bank went bankrupt, therefore the chief executive is to blame.” You have to show a direct link (between executive actions and a collapse).”
Indeed so. You can’t prove a link between the decisions of chief executives and the performance of massive companies. So why then should they get huge pay packages if their companies are successful? Why do they get the benefit of the doubt on both the upside and the downside? For those lucky enough to get to the top of these organisations, ahead of all the many people who are equally qualified to do the same job, a simple principle applies: Heads I win, tails you lose.
When it comes to high pay in the corporate world, one of the most popular mantras is that we shouldn’t reward failure. This comment is so blindingly obvious that one wonders why anyone would bother saying it. But why are we rewarding failure and how do we stop it?
Vince Cable, the UK Business Secretary, last month told the Liberal Democrat conference that he was no longer prepared to accept “pay-outs for failure”. Now the Association of British Insurers, whose members own more than 12 per cent of the UK stock market, said in a report that its members should “strongly resist any payment for failure.”
In his response to Cable’s speech, John Cridland, the CBI Director-General, quickly got to the core of the matter. “Payment for failure is unacceptable, but it must be recognised that the jobs market for senior company executives is one where talent competes globally.”
No company sets out to reward failure. They end up doing so as a direct result of the talent ideology, discussed in depth in my book “Pay Check”. The skills of a chief executive are deemed to be extremely rare. Therefore, when someone is offered the job of a chief executive, it stands to reason that they are thought to possess these extremely rare skills. As such, they are in an all-powerful negotiating position, and can demand a huge salary and a contract that provides for a substantial parachute payment in the event that the company later decides to part with their services.
A lot of hot air is talked about this issue, but to no avail. Reward for failure will persist in a free market until the talent ideology is properly challenged.
A recent paper in the Journal of Economic Behavior and Organization – “Why do leaders matter? A Study of Expert Knowledge in a Superstar Setting” – argues that there is a strong link between success as a basketball player and success as a basketball coach.
The paper offers three possible reasons for its findings. First, the previously successful player may have a deeper insight into the game. Second, he may have more credibility with his players because he himself reached the heights. Third, the reputation of the previously great player, now the coach, may make it easier to recruit top players.
A cursory glance at top football clubs would appear to contradict the idea that playing and coaching ability are closely related. Jose Mourinho had no professional playing career; nor did Andre Villas-Boas. Arsene Wenger had a very mediocre one. Alex Ferguson was a moderately good player (he never played for Scotland at full international level), but as a coach he has been a superstar. Other examples from football history abound.
This success comes despite the undoubted truth that former great players will have much more credibility and will be in a better position to recruit other top players at the start of their coaching careers.
The culture of football has changed slowly. Mourinho and Villas-Boas would never have been given a chance a generation ago, when great players would find it easy to pick up a good coaching job immediately upon retirement from playing, but then often go on to disappoint.
It will be interesting to see further research in this area. I strongly suspect that as the culture in basketball catches up with football, and the perceived connection between coaching and playing is undermined, those with little playing experience but excellent coaching potential will increasingly make their mark.
What is certain, however, is that this paper would be warmly received in the corporate world, where surveys consistently reveal the low regard in which managers are held.
Companies like to reward good performers with management positions because doing so stops them really having to think about necessary managerial qualities, and because they can’t think of how else to keep them happy in a hierarchical structure.
What’s more, current managers, who were usually promoted because of their performance in a functional role, will be happy with the message that they are the best-equipped to manage effectively.
The sad reality, however, is that many of their team members will disagree.
You can read a detailed review of my latest book “Pay Check” on The Economist website here.
An interview with me on the subject of “Pay Check” appeared on the Business and Leadership website, entitled “The Myth of Talent“.