Column: Roger's Soapbox

Antisocial Compensation

By: | July 6, 2017 • 3 min read
Roger Crombie is a United Kingdom-based columnist for Risk & Insurance®. He can be reached at [email protected]

A newspaper I worked for once printed a league table of CEO pay in the Bermuda insurance industry. The table contained only one mistake. The best-paid CEO reportedly earned $5.1 billion that year. Yes, billion. His peers were on an average of $1 or $2 million a year.

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The $5.1 billion wasn’t a random figure. It was his company’s gross premiums for the year. Simple enough mistake, sort of.

The CEO told me that he wasn’t thrilled, but admitted that when his peers read the table, they might raise their pay gigantically, and then he’d have to do the same. He was kidding.

Cognitive dissonance is the discomfort that arises from holding two opposed opinions simultaneously. An example might be seeing your mother-in-law drive your new Jaguar over a cliff, as the old joke has it.

I suffer from cognitive dissonance on the subject of executive pay.

Obviously, the most qualified, capable and efficient person in a company should earn top dollar, yet the level at which CEOs are paid in many industries astounds me.

Relax: I don’t count insurance among those industries. Yes, insurance CEOs can make big money, but not at the level of their peers in, say, hedge funds, retail or other pursuits. (And not with a carried interest loophole, either.)

A gigantic paycheck is anti-social. People aren’t on minimum wage because that’s what their work is worth; it’s because that’s all they can get.

Relax further: I’m not overly distressed by the average gap between those at the top of much of the pay scale and those at the other end. We’re capitalists. Belief in meritocracy, and rewards that match responsibility and performance, are articles of faith.

Here’s what I’m talking about: Marc Lore, chief executive and president of U.S. e-commerce at Walmart, made nearly $237 million in 2016. Tim Cook, CEO of Apple, pulled down $150 million, and John Weinberg of investment banking advisory firm Evercore Partners was paid $124 million that year. Those numbers exclude profits from stock options, as I understand it.

See what I mean? Those guys and their peers are top businessmen who deserve rich rewards, but $237 million a year — almost a quarter of a billion — just sits wrong.

These monster pay packages are fair, proponents argue, because (a) the execs might command as much elsewhere; (b) their efforts add more to the bottom line than they cost; and (c) the company’s remuneration committee said it was OK.

Hmmm.

Top-level insurance bosses, the guys who take on our risks, typically make between $10 and $25 million a year. Seems reasonable, doesn’t it?

Besides all that, what would you do with the money? Once you’ve bought the homes, the yacht, and gold everything, what would you do with next year’s $237 million?

That’s my lack of ambition speaking. I know it’s not about the money. It’s about the power. That big, swinging pay packet is the most concrete evidence of power in action.

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A gigantic paycheck is anti-social. People aren’t on minimum wage because that’s what their work is worth; it’s because that’s all they can get. Reading that a store executive made more in a year than the worst-paid 15,000 full-time workers in his town is hardly a recipe for social cohesion.

Solutions are hard to divine. Legislation, such as pay caps, is always a terrible idea. Ditto penal taxation. A little common decency in the more powerful boardrooms might not go amiss.

Shareholders are the only ones with the power to change corporate remuneration policies. Normally, if everyone’s making money, shareholders don’t care, but lately, British shareholders have been agitating for changes to executive pay.

Sir Martin Sorrell, founder of advertising agency WPP, has survived a series of peasants’ revolts, but his pay last year was cut to £30 million ($39 million). Shareholders would like to reduce it to $17 million this year. That would be in line with what insurance company chiefs take down, and they have real jobs.

Executive pay: enough, already.

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