Apple chief executive Tim Cook has just received his annual bonus. Well, sort of. Under a pay plan put in place when he succeeded Steve Jobs, Cook last Friday was due to get something like 560,000 Apple shares, valued at about $121 million (€104 million). Nice work if you can get it. His bonus was in part driven by the fact that Apple’s share price has gone up a lot while he has been chief executive.
Many executives across different industries are rewarded in similar fashion – perhaps not on the scale of Mr Cook’s bonus, but they often get large dollops of shares, or options, based on the underlying share price.
The design of executive compensation plans is often criticised for enriching managers, sometimes beyond the dreams of avarice, for merely doing their job. Mediocre managerial performance can still be an enriching experience if the original bonus scheme was poorly designed. Persimmon is a UK house-building company that now admits that one of its designs – for executive pay, not houses – was badly put together. A furore ensued when the company’s chief executive reaped a bonus of more than £100 million (€110 million). Two senior directors have subsequently resigned.
Persimmon’s bonus bungle illustrates nicely what can go wrong. Since the scheme was put together, the company’s share price has almost quadrupled. The managers of the business, including the chief executive, deserve to be both congratulated and rewarded for that performance. But bonus scheme designers have to be able to isolate that part of the share price performance that is due exclusively to managerial excellence.
It could be that the vagaries of stock market valuations account for at least some share price movement: disentangling this is tricky. There are often company or industry-specific factors at work that managers have little control over: in Persimmon’s case, house builders were given a boost by government policy. The help-to-buy scheme introduced by the British government undoubtedly helped UK house builders.
Wealth inequality
Stories such as these generate headlines and prompt politicians to demand that “something must be done”. Executive pay, fair or otherwise, is also linked to the debate over income and wealth inequality. Again, the headlines proclaim that inequality is the scourge of the modern age and something must be done.
Inequality is a particular problem for the US. Commentators in the UK make lots of claims about how inequality is getting worse in Britain, claims that are not supported by the data (UK inequality measures essentially paint a flat picture since the 1980s). In Ireland the most commonly accepted measure of inequality puts us in the middle of the OECD league table. South Africa is at the bottom of that ranking, while Iceland emerges as the most equal society.
That’s a key feature of the inequality debate: you have to get your hands dirty with the data and be prepared to be surprised by the results. It’s also an area of active research: the increasing availability of large data sets and improvements to the analytical tool kit mean that we can ask all sorts of new questions and get new answers. And, as a result of very recent research, we can make connections between seemingly unrelated but critically important features of the global economic landscape.
There are unexpected linkages between inequality, low productivity growth (pretty much everywhere), the mystery of missing wage growth in ultra-tight labour markets (particularly in the US and UK), low interest rates and the ever rising US stock market.
The US equity market is up about 7.5 per cent in the year to date, about the only major economy that is generating decent stock market returns in 2018. But a very small number of companies account for all of that share price performance. It’s a case of winner takes all in the stock market, as Mr Cook can no doubt identify with.
Technological change
The growing market dominance of firms that capture an ever-increasing slice of the pie is attracting the attention of academics and policy makers. John Van Reenen of MIT told the recent annual symposium of the world’s central bankers at Jackson Hole in the US that this is not, as is commonly supposed, a simple function of the failure of regulators to rein in old-fashioned monopolies and/or uncompetitive practices.
Something else, he thinks, is going on: it’s more about globalisation and technological change combining to produce “winner takes all” companies. Van Reenen points out that growing income inequality is mostly between rather than within firms. Too many of us don’t work for Apple or the other mega successful firms, so we don’t share in their winnings. Van Reenen’s work also highlights the surprisingly high variability of managerial quality around the world: work for a well-managed business is good career advice.
At the same meeting, Andrew Haldane, chief economist at the Bank of England, also talked about the growing dominance of a small number of firms. If powerful employers explain lack of wage growth, then interest rates can stay lower for longer. But Haldane also raises questions about what could or should be done to curb the global giants. He seems to think competition authorities could be doing a lot more.
Winner takes all is natural and fun to watch in, say, Premier League football. But when it starts to distort global economic structures, it becomes something far more sinister.
