The neo-feudal revolution

2 Oct 2013 By Edward Hadas

I have nothing against Stephen Elop. The former and future Microsoft executive seems to have done a pretty good job running Nokia. It’s a little awkward that he was offered $7.3 million to move from Microsoft to the Finnish phone-maker and stands to receive $25.4 million to rejoin his former employer. But the tech industry often has a slightly incestuous feeling, and there were plausible strategic arguments for both moves. Elop did what almost any senior American executive would have done – negotiated and renegotiated favourable contracts.

However, Elop’s packages are part of an outrageous system of executive remuneration. It features pointlessly complex arrangements – base salary, cash bonus, a small collection of share plans plus substantial payments for coming and going. The deals are rigged in the executive’s favour; Elop obtained highly attractive last minute alterations just before the sale of the phone business. And the numbers are all unjustly large, by any relevant standard.

The announcement of Elop’s terms was understandably met with widespread disgust. The same response is typical whenever executive pay comes up.

Such an unpopular system could be changed quite easily. Just pass a few laws or enact a few regulations. The wish list is quite simple: ban deferred pay and bonuses for people with very high salaries, and impose a ratio capping the highest pay at no more than 15, 20 or 40 times the average.

These changes should be easy to enact. After all, a more straightforward and less generous remuneration regime would be politically popular. The affected executives and some free-market purists would be opposed, but most economists should be strongly in favour, since bosses who were less distracted by pay negotiations and less interested in short-term share price moves would be more effective.

Why, then, have the ultra-high top executive pay practices continued almost unabated? I have three basic answers to this question: financial-psychological, conspiratorial and sociological.

The financial-psychological argument is that top executives all think they deserve above-average pay, while the members of the boards who negotiate contracts all think their companies should have above-average executives. The result: pay ratchets up each year to keep ahead of the pack. That explanation is not wrong, but it just begs a larger question about the economic system: why do shareholders, regulators and voters go along with this expensive delusion?

The conspiratorial reasoning goes something like this: the elite are all in it together, and they have the power to distract or ignore the will of the people. That’s not exactly wrong, either, although it is less of a conscious conspiracy than a sort of noxious group-think. Rich people do not sit around cackling greedily about their ability to mistreat the rest of society; they are mostly persuaded that the social arrangements which they perpetuate are helpful, fair or unavoidable.

The conspiracy analysis raises a broader question – whatever happened to the egalitarian spirit which dominated political thinking in many developed economies, including the United States, for most of the last century? If that spirit still prevailed, the masses could outvote the elite and change things. In fact, though, protests against the privileged “1 percent” have not gone very far.

That leaves a possible sociological explanation: egalitarianism has given way to a sort of neo-feudalism. Society was never level, but for decades the very wealthy accepted high marginal tax rates and relatively narrow pay differentials. They had to, since that was what the less well-off wanted – and in democracies the people’s views prevailed. Now, though, the elite can get away with a grasping self-confidence reminiscent of pre-revolutionary aristocrats, while everyone else is left having to accept grudgingly that their social and economic betters will always end up with a disproportionate share of the wealth.

If that is right, is neo-feudalism here for good? Perhaps the century of egalitarian social democracy was no more than an aberration. After all, pre-industrial societies were typically aristocracies and successful revolts almost always ended with a new aristocratic group in power. Perhaps it has just taken a while for advanced industrial societies to find their own type of aristocracy.

I hope that’s not right. I would love to see much more than the tiny steps made so far – a Swiss ban on Elop-type leaving payments and a European Union limit on the ratio of bonus to salary for bankers. I would welcome a democratic revolution which swept away the current executive pay arrangements, as well as the political influence of the financial-corporate complex. But I fear that the future, like the past, belongs to the Elops of this world.


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