"the richest are rich not because they are gaming the system but – by and large – because they’re very talented, took risks and worked their guts out."
At least, that's what an article in the Spectator magazine would have us believe.
No doubt many of the richest are very talented, take risks, and work their guts out. But 'richest' is a relative thing: to be 'richest' you have to be more rich than other rich people, who themselves have to be richer than not rich people. By correlating 'richest' with 'talent' and 'hard work' the Spectator, and they are not alone, suggests - by and large - the richest are more talented and hard working than everyone else.
No doubt many of the richest are very talented, take risks, and work their guts out. But 'richest' is a relative thing: to be 'richest' you have to be more rich than other rich people, who themselves have to be richer than not rich people. By correlating 'richest' with 'talent' and 'hard work' the Spectator, and they are not alone, suggests - by and large - the richest are more talented and hard working than everyone else.
So is talent and hard work the real reason - by and large - for richness? Whether the richest bankers have more talent, take greater risks and work their guts out so very much more than a professional soldier, scientist, or surgeon is open to a scrutiny we won't conduct in this particular post.
In any case Free Marketeers, among the greatest advocates of high pay, would say none of that talent, risk and guts stuff matters. Free Marketeers would say Merit doesn't define Pay, Pay defines Merit. The Free Market, they assert, may not be infallible but it quickly corrects itself. A Free Marketeer would assert if you are regularly paid a lot over the medium term - i.e. not just a spot of luck with the National Lottery - then you must be meritorious.
Is that actually true? Or has the Market for Pay been captured by those being paid the most to ensure they continue to be paid the most? Has the Free Market in executive pay become a Phoney Market?
In any case Free Marketeers, among the greatest advocates of high pay, would say none of that talent, risk and guts stuff matters. Free Marketeers would say Merit doesn't define Pay, Pay defines Merit. The Free Market, they assert, may not be infallible but it quickly corrects itself. A Free Marketeer would assert if you are regularly paid a lot over the medium term - i.e. not just a spot of luck with the National Lottery - then you must be meritorious.
Is that actually true? Or has the Market for Pay been captured by those being paid the most to ensure they continue to be paid the most? Has the Free Market in executive pay become a Phoney Market?
Consider top executives of companies listed on the London Stock Exchange. The Free Market puts a value on their companies by pricing the shares. In a large and liquid market, such as the FTSE100, the price set is a genuine attempt by investors to make themselves richer. Driven by selfish motives these investors' valuation of companies is an honest one.
On the other hand, the pay of the top executives in these companies is set by their Remuneration Committees. Committees which to a large degree are made up of other top executives who themselves depend on their own Remuneration Committees for their pay. According to a report by the TUC, "A Culture of Excess", there is a huge cross-dependency of top executives setting one another's pay:
"Remuneration committee members are drawn from a narrow constituency, consisting mainly of other board members. In 2014, 246 out of 383 FTSE 100 remuneration committee members (64 per cent) held at least one other position on another board. Over a third of FTSE 100 companies have an executive director from another company on their remuneration committee. Two thirds of FTSE remuneration committees share one member with another remuneration committee from the FTSE 100."
We can see how executive pay has ramped up from a report, "How to make high pay fairer", published in July 2014 by the High Pay Centre think tank. The report stated:
"Typical annual pay for a FTSE 100 CEO has risen from around £100,000-£200,000 in the early 1980s to just over £1 million at the turn of the 21st century to £4.3 million in 2012.1 This represented a leap from around 20 times the pay of the average UK worker in the 1980s to 60 times in 1998, to 160 times in 2012 (the most recent year for which full figures are available)."
Contrast this rocketing pay with the declining value placed by the Free Market on companies traded on the London Stock Exchange. The Office for National Statistics (ONS) provides some handy graphs to help us out here:
1) In nominal terms (not adjusted for inflation) the value of the FTSE All Share in 2014 (which had done better than the FTSE100) was over 13 times higher than the 1980 level, while FTSE100 CEO pay has gone up over 28 times in nominal terms:
2) However:
a) The inflation adjusted values show the total value of the market in 2014 is well below its value in 2000.
b) Compared to the UK GDP, the value of the stock market is well below what it was in the 1990s.
Why is this important? Two of the reasons are:
1) It is said that burgeoning top pay does not hold down bottom pay. That may be true if the question is simply diversion of bottom pay into top pay packets.
At Barclays, a favourite dartboard of high pay protesters, it wouldn't make much of a difference to it's lowly employees by taking a chunk out of top pay.But top pay is justified by profits. And according to Gavyn Davies, economist and hedge fund manager and former chairman of the BBC, two thirds of company profits come from holding down bottom pay.
2) As those at the top, who direct the government of Britain, no longer need public services they don’t feel the pain when those services are cut. Those who can afford private health, private education, and those who don’t live in areas that need strong policing, don’t notice when what they don’t need is not there.
And I suppose it would be churlish of me to mention the taxes of the 1% contribute to the welfare state that allows them to keep their staff on low wages knowing they will be topped-up with benefits, and keeps their staff healthy and educated enough to turn up to work without having to pay them enough to buy those services themselves.
