I’m reading a great little book by David Bolchover. It’s called Pay Check and asks the simple question “Are top earners really worth it?”
No, it didn’t take me long to come up with the answer either.
But the interesting thing here is not that they aren’t worth it. It’s why they think they are, and how they get away with their ludicrously large paycheques when we all know they aren’t. It all comes down to the “talent myth,” says Bolchover.
Consider the case of Lionel Messi (a very good Argentinian football player, apparently). His individual performance and impact are very measurable: we know how many goals he scores and how many he helps to score. We can see his skill in action. So we know he is a rare talent and that if his current club doesn’t pay him a fortune, someone else will. According to the theory, the same is true of top CEOs: they have a rare talent and must therefore be paid a fortune – 531 times the average blue collar worker’s pay in the US at the moment.
But there’s a problem here. We can’t measure a CEO’s talent as we can that of Mr Messi. We can’t know if any one CEO has a rare talent – or any talent at all. Every big company has tens of thousands of employees contributing to success or failure. Indeed, many companies perform well despite poor leadership, helped along by buoyant economies, market positions put in place by predecessors, or excellent middle managers.
The fact that we can’t measure this talent doesn’t mean it doesn’t ever exist. But it does make the case much harder to prove. It seems very, very likely that there are actually a substantial number of people knocking about just as capable of doing each CEO’s job as the CEO in place.
But if that’s the case, then what’s going on with the paycheques? The truth, says Bolschover, is that senior executives have made use of the difficulties of measuring corporate performance “to further their own financial agenda,” constructing and “jealously guarding” an ideology of talent that allows them to keep getting grossly overpaid.
This is irritating. But it is also dangerous. It makes the rest of us angry, particularly in hard times. It stifles entrepreneurship – why take risks when you can get rich without doing so? And it encourages the culture of entitlement: to make us do things that cost us effort we need to see entrepreneurs, not corporate big wigs, buying new yachts.
But there’s another problem too. Our tolerance of the talent myth is costing us all money every day. It is costing us as shareholders. Every penny paid to an over-egoed top man and his team is a penny that isn’t paid into our dividends. But it also costs us as taxpayers, thanks to the fact that the talent myth has spilled over into the public sector. How often have you heard councils justify paying their heads £200k on the basis that if they didn’t, said council head would defect to the private sector and take his special talents with him – when it is perfectly obvious to all outsiders not only that he couldn’t but he wouldn’t.
He couldn’t because he doesn’t have any special talents, and because he wouldn’t be an insider in the private sector – it is hard to jump bandwagons. And he wouldn’t because he knows that. Yet every time we fall for the idea that he might go, and every time we tolerate his salary and perks, we bump up our own tax payments.
There is much to be done this decade to make life start feeling vaguely fair again. But shareholders and taxpayers can make a good start in 2010 by starting to refuse to pay up for the beneficiaries of the talent myth, who are getting rich at their expense.