NCPA - National Center for Policy Analysis


June 11, 2008

Popular unease over the gap between rich and poor is prompting leaders in France, Germany and the Netherlands to legislate against boardroom excesses.  Some fear this could backfire, says the Financial Times.

Although it is hardly a popular argument, some economists argue intervention to redress the supposed "wrongs" of the marketplace could prove counter-productive, driving away talent and rendering the whole market for executive pay more opaque.  If the public clamor persists, there could be an increasing flow of talent from Europe to the US, and from public-quoted companies to lower-profile private equity funds, says the Times.

The high levels of executive pay are defended by some economists.  Consider:

  • Chief executives' pay has generally increased in line with the value of the companies they run; in recent years, as the average size of companies has been amplified due to globalization, CEO pay has also undergone corresponding increases.
  • Next year, executive compensation is expected to decrease as a result of the world economic slowdown.

"Golden parachutes" -- the large bonuses given to departing chief executives - have been widely criticized.  Christine Lagarde, France's finance minister, argues that CEOs should not receive massive payments irrespective of achievement.  However, golden parachutes provide important benefits:

  • They can encourage executives to reveal -- not conceal - negative information and mistakes, to the ultimate benefit of shareholders.
  • Golden parachutes also speed up the replacement of CEOS by making them willing to leave.

Despite the loud denunciations of executive income, the pay gaps in Western Europe remain among the lowest in the world: a 61-country income study, conducted by Hay Group, found that the gap between the salaries of senior managers and clerical workers in the region were among the most compressed. 

Source: John Thornhill, Richard Milne and Michael Steen, "Accent on Egalite," The Financial Times, June 9, 2008.


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