Future of work: Inequality, overpaid CEOs and the value of labour

Future of work: Inequality, overpaid CEOs and the value of labour

Phuah Eng Chye (2 February 2019)

The widening disparities between the escalating pay of top executives and the stagnating wage of workers have become a focal point of public discontent. Susan Holmberg and Mark Schmitt note “the staggering, uninterrupted rise in CEO pay over the past three decades, following a long period of moderation in both executive pay and in overall economic inequality. Between 1940 and 1970, average CEO pay remained below $1 million (in 2000 dollars). According to the Economic Policy Institute (EPI), from 1978 to 2013, CEO pay at American firms rose a stunning 937 percent, compared with a mere 10.2 percent growth in worker compensation over the same period, all adjusted for inflation. In 2013, the average CEO pay at the top 350 U.S. companies was $15.2 million”.

High CEO pay has generated criticism that it incentivises top managers to focus on maximising short-term returns to shareholders rather than to invest in workers or the business. Susan Holmberg and Mark Schmitt suggest “the greater cost may be the risky behaviour that very high pay encourages CEOs to engage in, especially when pay is tied to short-term corporate performance”. This includes manoeuvres to raise share prices which may involve share buybacks, cutting costs or even unethical conduct and fraudulent activities. These activities can feed into asset price bubbles with systemic financial consequences in the aftermath.

There have been many attempts to control CEO compensation. Kevin J. Murphy notes “over the past 80 years, Congress has imposed tax policies, accounting rules, disclosure requirements, direct legislation, and other rules designed explicitly to address perceived abuses in executive compensation. With few exceptions, the regulations have been either ineffective or counterproductive, typically increasing (rather than reducing) agency problems and pay levels, and leading to a host of unintended consequences”.

He explains “part of the problem is that regulation – even when well intended – inherently focuses on relatively narrow aspects of compensation allowing plenty of scope for costly circumvention…In introducing plans that tie pay more strongly to performance as demanded by shareholders, directors routinely agree to pay more than necessary to compensate for the increased risk. Self-interested CEOs seek employment protection through overly generous severance provisions; directors acquiesce believing that the probability of failure is low (and because it is not their money anyway)”.

The establishment of Board committees (comprising independent directors) and the use of consultants to determine compensation has also been derided. Lucian Bebchuk and Jesse Fried argue skyrocketing executive pay is “the blatant result of CEOs’ power over decisions within U.S. firms, including compensation…It offers personal and professional connections, prestige, company perks, and, of course, money. In 2013, the average compensation for a board member at an S&P 500 company – usually a part-time position – was $251,000. It only stands to reason that board members don’t want to rock the CEO’s boat. While directors are elected by shareholders, the key is to be nominated to a directorship, because nominees to directorships are almost never voted down…CEOs can use their control over the company’s resources to legally (and sometimes illegally) bribe board members with company perks, such as air travel, as well as monetary payment”.[1] Pay consultants are incentivised to ensure CEOs are highly paid as their fees (including those for executive searches) rise as CEO pay increases. Survey benchmarks also have the effect of ratcheting up CEO compensation as well.

Alex Edmans notes “a focus on pay ratios may have similar unintended consequences – and could even increase inequality. A CEO might reduce his company’s pay ratio by firing low-paid workers, converting them to part-time status, or increasing their cash salary but reducing their non-financial compensation (such as on-the-job training and superior working conditions). A cap could also lead boards to focus on the optics of pay (e.g. a low ratio) and ignore more important dimensions, such as performance targets being long-term rather than short-term”. He adds “an employment contract is an extremely complex issue[2] and cannot be whittled down to a simple number such as a pay ratio”.

Alex Edmans also argues that since “it is shareholders who bear the costs of paying the CEO, and so it is unclear whether the government should intervene”. While there is no evidence that high pay incentivises CEOs to take actions that hurt society and states “it’s not clear why the government should regulate pay rather than these actions themselves – surely the most direct route to curtailing them”. For example, “if inequality is truly the concern, it may be better addressed by a high rate of income tax and closing loopholes that tax investments at a lower rate. This will address inequality resulting from all occupations (including sports, entertainment, and trust funds); it’s not clear why CEOs should be singled out.”

In this regard, he concludes its best “to leave the decisions to major shareholders, who have the expertise and incentives to get these decisions right. After all, high CEO pay comes straight out of shareholder returns, and if the contract causes the CEO to take bad decisions – or demoralizes employees and customers – shareholders suffer the consequences. Unlike regulation, which is one-size-fits-all, shareholders can decide what the optimal pay package is for that particular firm…Moreover, when pay is inefficient, it is often a symptom of a more underlying corporate governance problem, brought on by conflicted boards and dispersed shareholders. Addressing pay via regulation will solve only these symptoms; encouraging independent boards and large shareholders will solve the underlying problem. That will improve not only pay, but other governance issues”.

Similarly, Susan Holmberg and Mark Schmitt suggest “there is no silver bullet to slow the growth of CEO pay” and that “none of those will be fully effective without rethinking the very purpose of the corporation”. They prefer adopting the stakeholder or European governance model where workers may be represented on boards or councils and where corporations may be deemed to have broad social responsibilities.

Along these lines, Elizabeth Warren recently proposed the Accountable Capitalism Act to require corporations with revenue above $1 billion – affecting a few thousand companies that account for a large share of overall employment and economic activity – to obtain a federal charter of corporate citizenship. The charter would require company directors to consider the interests of all relevant stakeholders – shareholders, customers, employees and communities and would allow workers to elect 40 percent of the membership of the board of directors[3]. This initiative is aimed at diluting shareholder primacy, ensuring the largest companies are not solely focused on profits and that the Board gives greater weight to issues relating to workers welfare, the long-term business development and on community issues.

But there isn’t convincing evidence that governance controls are effective in containing CEO pay. In my view, a major cause of widening pay disparity is information disruption. The disruption of traditional organisation[4] and wide disparities[5] in individual productivity, creativity and brand power has sharpened the pay differentials in different segments of the labour market. In this context, the Winner-Take-All (WTA), incentive-based pay structures, the fissured workplace, globalisation[6] and financialisation provide overlapping explanations of the co-existence of stagnating wages and ballooning CEO pay.

Broadly, competition is producing completely different outcomes in different market segments. In the mass market, technology has expanded the range of jobs where production is flexible and labour is substitutable. Due to their expanded choice of options, employers prefer to ride out labour shortages and not bid wages upwards. They prefer to employ only if there are job takers at low prices. Hence, competition results in lower prices in the mass market as employers have greater choice. In the “performance” segment, “talent” is viewed as critical to achieving success. Given perceptions that the pool is limited, employers bid aggressively for talent. There are several interesting issues to explore in relation to CEO pay.

  • Value is highly subjective. It is extremely difficult to justify the outrageous wages as the value to individual’s contribution to a final product or outcome is a highly subjective and contentious issue. Many individuals think they deserve more while at the same time inclined to believe that others are overpaid.
  • Pay as a means of signalling status. It is doubtful higher pay can make highly-motivated individuals work any harder or perform any better. David Graeber’s hypothesis on bullshit jobs debunks the relationship between pay and higher productivity. He instead suggests there is an inverse relationship between compensation and social benefit. In this context, there seems to be resistance against paying more to those who undertake essential work (e.g. nurses, garbage collectors, or mechanics where “were they to vanish in a puff of smoke, the results would be immediate and catastrophic”). His hypothesis is that a form of managerial feudalism has emerged to replicate classical feudalism where profits are extracted from commoners and then distributed to “an entourage of followers that is both the visible measure of one’s pomp and magnificence, and at the same time, a means of distributing political favour.” Hence, pay is a means of signalling a person’s status.
  • Brand value and WTA effects. While the value of a CEO is debatable, there is probably less disagreement over what football players can bring to a team. The transfer values and wages of the top football players has soared despite the imposition of financial restraints. In this regard, footballers are very much like Baumol’s infamous string quartet[7]. Though wages have soared, the number of minutes they are on the field are unchanged. While there is no impact on output (number of games), nonetheless players can have a significant impact on revenues. The best players draw the crowds, sell jerseys and, together with the club, attract branding revenues. Due to the high player acquisition cost and wage bill, most football clubs (including the top clubs) struggle to make a profit. But investors are willing to invest huge sums and pay a premium to own well-known football clubs; even though the prospects of getting a decent return is slim. In this regard, football clubs are similar to internet stocks. Investors are willing to pay substantial premiums for uncertain long-term prospects to get a piece of the action. WTA effects are evident as only a couple of clubs can emerge as winners. The managers of clubs that don’t deliver results are sacked and the high pay they received may reflect compensation for the risks.
  • Ecosystem effects. The CEO high pay has a ripple effect on the ecosystem. The next tier of players and management staff (coaches, marketing staff) benefit as their wages are pulled upwards to track the wages of the highest-paid footfall stars. It is worth noting the monetisation of participation changes the organisation and culture of the ecosystem. The intermediaries or players’ agents earn enormous commissions from the transfer market. The football grassroots communities evolve into a feeder system supporting the top clubs who create a thriving trade in football talents. Similar trends are also evident in the technology and finance ecosystems where direct employees of the mothership companies are paid substantially higher wages.
  • Scalability and polarisation. Football, unlike orchestra concerts, are highly scalable. The most ambitious clubs need to buy the best players and managers to compete to be among the top clubs and to build a global franchise. Without the best talent, clubs will fall behind. Size similarly influences CEO renumeration. CEO pay grows in line with the expansion of corporate revenues and market capitalisation. Greater deployment of scaling strategies will lead to greater polarisation. Reinforced by circular effects[8], the “inequality distance”[9] or gap between the smallest and largest unit will continually widen over time.

The fact that information-related forces are the main cause of widening wage differentials provides an explanation as to why it will be difficult to reverse these trends. Strategies to address the wage differentials therefore need to be analysed within the context of broad economic trends. In this regard, the policies on pay need to be consistent and aligned with other objectives to be mutually supportive.

In this context, wage differentials relate to the country’s competitive strategies on talent and the service industry. Economies such as Japan and in Scandinavia favour egalitarian societies. They have cultural norms which restrain CEO wages and this is reinforced by high taxes. But restraining CEO wages holds the economy back from competing for global talent as well as in retaining local talent. In contrast, countries such as the US and UK have strong market and global cultures. They are more tolerant of inequality and are willing to offer high salaries to attract global talents and to sustain global leadership in segments such as healthcare, education, technology, finance and football. One other point to consider is that there is room for only a few countries to adopt such “winner-take-all” strategies. Other countries will need to adopt second-best competitive strategies for talent.

One area that should be clarified relates to the tendency to associate overpaid CEOs with corporate short-termism. To be fair, consolidation strategies (cutting wage costs, curtailing investments and share buybacks) may be the best strategy in matured industries plagued by over-capacity and facing disruption. CEOs must decide whether they want their firm to be the survivor buying out competitors or whether their firm should be the one being bought. On this note, controlling CEO pay would not change the structural forces that causes corporations to downsize rather than to expand their operations.

Finally, there is a need to explore the relationship between wage differentials and monetary policy. First, the recent experience suggests quantitative easing has a powerful effect on stimulating profit and CEO pay but not wage inflation. In relation to this, I argued earlier[10] that wage-driven growth operates differently from profit-driven growth. Rising wages operates through households and generate cost-push inflationary pressures. In contrast, rising profits operate through corporates, markets and the financial industry and generate deflationary effects on aggregate demand which is usually offset by expanding debt or financial assets.

Second, there is an implication that talent is a highly mobile and tradeable asset in a financialised and globalised economy. Hence, quantitative easing which has a positive impact on asset prices also have a positive impact on the pay of CEOs and football players. This hypothesis will be tested by seeing how the pay of CEOs and football players react to monetary tightening and falls in asset prices in the future.

Third, monetary policy seems to have an inherent bias against wage increases. History have conditioned the monetary authorities to be vigilant against cost-push inflation. Every time there is sufficient labour market tightness to support wage increases, the authorities will tighten monetary policy to pre-empt wage increases. The battle against cost-push inflation was fought 50 years ago and the landscape has changed significantly with the fall in the labour share of income to the point where economies generally face difficulty in generating private sector growth due to weak household income conditions. If the policy objective is now to overcome wage stagnation, then monetary policy needs to be recalibrated to tolerate higher levels of wage inflation.

In my view, the excessive pay of top management is a diversion from the more critical objective of overcoming wage stagnation which is weakening household income and undermining social cohesion. Hence, it is more purposeful for governments to focus on increasing wages for the majority of workers or, in other words, to strengthen the wage baseline. Rather than impose disincentives for high CEO pay, it is probably more effective to provide incentives to increase the wages of lowly-paid workers (and contractors). The government could also take the lead by increasing the salary of civil servants or through policies to encourage wage increases. This can help to rebalance the labour share of income in that higher wages may cause profits to fall. Hence, many CEOs may end up getting sacked or not get a bonus but there would be few sympathisers. Falling profits implies falling asset prices and this may require monetary intervention. It would be ironical that overcoming the twin threats of wage stagnation and asset price falls may actually require a policy combination that supports wage inflation and expansionary monetary policy.


Alex Edmans (18 July 2016) “Stop making CEO pay a political issue.” Harvard Business Review. https://hbr.org/2016/07/stop-making-ceo-pay-a-political-issue

David Graeber (2018) Bullshit jobs: A theory. Allen Lane.

Kevin J. Murphy (12 August 2012) “Executive compensation: Where we are, and how we got there”. George Constantinides, Milton Harris, René Stulz (eds.), Handbook of the Economics of Finance. Elsevier Science North Holland; Marshall School of Business Working Paper No. FBE 07.12. http://dx.doi.org/10.2139/ssrn.2041679

Matthew Yglesias (15 August 2018) “Elizabeth Warren has a plan to save capitalism: She’s unveiling a bill to make corporate governance great again”. Vox.com. https://www.vox.com/2018/8/15/17683022/elizabeth-warren-accountable-capitalism-corporations

Phuah Eng Chye (2015) Policy paradigms for the anorexic and financialised economy: Managing the transition to an information society.

Phuah Eng Chye (12 August 2017) “The services economy: Macroeconomic overview.” Economicsofinformationsociety.com.

Phuah Eng Chye (9 June 2018) “Labour share of income (Part 3: Causes of wage inequality)”. Economicsofinformationsociety.com.

Phuah Eng Chye (7 July 2018) “Labour share of income (Part 7: The respective roles of wages and profits)”. Economicsofinformationsociety.com.

Phuah Eng Chye (11 August 2018) “Future of work: The effect of intangibility on work”. Economicsofinformationsociety.com. http://economicsofinformationsociety.com/future-of-work-the-effect-of-intangibility-on-work/

Phuah Eng Chye (10 November 2018) “Future of work: Re-defining work (Part 2: Bullshit jobs and post-work).” Economicsofinformationsociety.com.

Phuah Eng Chye (19 January 2019) “Future of work: The price of labour”. Economicsofinformationsociety.com. http://economicsofinformationsociety.com/future-of-work-the-price-of-labour/

Susan Holmberg, Mark Schmitt (2014) “The overpaid CEO”. Democracy Journal No. 34.  https://democracyjournal.org/magazine/34/the-overpaid-ceo/

[1] Drawn from Susan Holmberg and Mark Schmitt.

[2] The complexity arises from having to deal with issues such as the optimal vesting schedule, the appropriate mix of stock vs. options vs. salary vs. pensions vs. bonuses and issues related to filtering out industry performance and performance vesting thresholds. Alex Edmans.

[3] Matthew Yglesias.

[4] Phuah Eng Chye “Future of work: Re-defining work (Part 7: The price of labour)”

[5] Phuah Eng Chye “Future of work: The effect of intangibility on work”.

[6] Phuah Eng Chye “Labour share of income (Part 3: Causes of wage inequality)

[7] In 1966, William J. Baumol and William G. Bowen observed the playing time for four musicians to perform a Beethoven string quartet would always be unchanged. This limited the scope for reducing labour resulting in a “productivity lag” where wages rise despite the absence of productivity gains. Phuah Eng Chye “The services economy: Macroeconomic overview”;

[8] The largest companies and projects usually commandeer the best resources such as talent, liquidity and locations and this has the effect of concentrating income and wealth in fewer hands.

[9] Phuah Eng Chye Policy paradigms for the anorexic and financialised economy: Managing the transition to an information society.

[10] Phuah Eng Chye “Labour share of income (Part 7: The respective roles of wages and profits)”.

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