Reading Piketty at the moment, which of course while fascinating is not entirely free from criticism (for example on his treatment of gender). Nor would I expect a work of this magnitude to be flaw free. Still here’s an interesting piece where he flags the massive rising US income inequality which he strongly suggests is linked to managers having the power to set their own remuneration packages. I also like his almost sarcastic dismissal of an alternative just deserts explanation:
Figure I.1. Income inequality in the United States, 1910– 2010
The top decile share in US national income dropped from 45– 50 percent in the 1910s–1920s to less than 35 percent in the 1950s (this is the fall documented by Kuznets); it then rose from less than 35 percent in the 1970s to 45– 50 percent in the 2000s– 2010s...
I will show that this spectacular increase in inequality largely reflects an unprecedented explosion of very elevated incomes from labor, a veritable separation of the top managers of large firms from the rest of the population. One possible explanation of this is that the skills and productivity of these top managers rose suddenly in relation to those of other workers. Another explanation, which to me seems more plausible and turns out to be much more consistent with the evidence, is that these top managers by and large have the power to set their own remuneration, in some cases without limit
and in many cases without any clear relation to their individual productivity, which in any case is very difficult to estimate in a large organization. This phenomenon is seen mainly in the United States and to a lesser degree in Britain, and it may be possible to explain it in terms of the history of social and fiscal norms in those two countries over the past century. The tendency is less marked in other wealthy countries (such as Japan, Germany, France, and other continental European states), but the trend is in the same direction. (p24)
It is worth recalling the golden circle of directors during the Celtic Tiger who also appeared to have a certain power over their payment packages due to their overlapping positions of influence and possibilities for exploiting reciprocity as directors on multiple boards:
In 2007, five of the eleven [the 11 most well-connected members of the Director Network] sat on at least one of the remuneration committees of the Interlocking Boards (1).
•Sean FitzPatrick, Ann Heraty and Gary McCann were members of the remuneration committee of Anglo Irish Bank that set the payment for the chairperson, who was SeanFitzPatrick;
• Sean FitzPatrick as chair of Anglo Irish Bank, was involved in setting the remuneration of non-executive directors, who included Ann Heraty and Gary McCann;
• Sean FitzPatrick was chair of Smurfit and was a member of the remuneration committee of Smurfit, hence involved in setting the remuneration of Gary McCann, who was CEO of Smurfit;
• Sean FitzPatrick was a member of the remuneration committee of Greencore, which set the remuneration of Ned Sullivan, chair of Greencore. Ned Sullivan was also a member of the remuneration committee of Greencore;
• Ned Sullivan was a member of the remuneration committee of McInerney Holdings [where he was also the chair].(1)
Another strategy involves hiring pay consultants that have a reputation for justifying excessive bonuses and pay rises. There is a suggestion that there may have been a touch of that in the Rehab charity scandal. Though it’s hard to know if CEO Angela Kerins had any say in choosing pay consultants Hay Group and Towers Watson who rated her excessive salary as “significantly below the market midpoint or ‘median’ when compared with organisations of similar scale engaged in similar activities”. They also advised Rehab before Kerins was granted her pay rise of €6,000 – a salary increase that occurred since 2011 during a time of cutbacks. These consultants have been criticised in the US for their role in expanding executive payment packages (although the article linked here could benefit from more definite sources). They were accused of digging “through their trove of privileged pay data to find other companies that can serve as “peer benchmarks” to justify the proposed raise — regardless of whether the other companies are truly similar”.
How widespread are these practices and should alarm bells be ringing? hmmm.
1. Clancy P, O’connor N and Dillon K (2010) Mapping The Golden Circle TASC [Online]. Available at: http://www.tasc.ie/publications/list/mapping-the-golden-circle/ [Accessed 11/11/2012], pIV, 3, 31.