As every spring, with the publication of the reference documents of listed companies, the remuneration of big bosses arouses indignant reactions. This year, a study by Fintech Scalens, a platform specializing in services for listed companies, showed in particular that the leaders of the CAC 40, the forty most valued companies on the Paris Stock Exchange, saw their remuneration double in one year, reaching an average of 8.7 million euros. Same upward trend in the United States: the hundred main American leaders saw their remuneration increase by 31% in 2021, to settle at around 20 million euros per person on average (including + 569% for the boss of Apple , Tim Cook, or even +65% for that of Goldman Sachs).
One name in particular caught the attention of the French press: that of Carlos Tavares, the general manager of the automobile group Stellantis (born from the merger between Fiat Chrysler and PSA Peugeot-Citroën), supposed to receive 66 million euros in remuneration. total in 2021, including a fixed portion of 19 million euros. This figure, made public between the two rounds of the presidential election, was considered “shocking”both by the candidate of the National Assembly, Marine Le Pen, and by the president candidate Emmanuel Macron, who also called for a cap on the remuneration of leaders at European level.
The case of Carlos Tavares indeed appears all the more controversial since under the mandate of François Hollande, a law was adopted so that the employer’s remuneration is subject to the approval of the shareholders. On April 13, the latter also opposed the payment of the 66 million euros at the general meeting of the group. But the vote, which took place at the new headquarters located in the Netherlands, only has an advisory function… The CFDT central union representative thus bitterly regretted, about the move: “We were assured, however, that it was for geographical neutrality, not for financial advantages…”
Decorrelation of performance
During the general assembly of the Stellantis group, the president John Elkann had justified this level of remuneration by explaining that he wanted “reward performance” of the leader who brought about the merger between Fiat Chrysler and PSA Peugeot-Citroën.
Yet the question of whether to reward success financially, although it has been widely debated in psychology since the seminal work of Edward Deci, is not what is primarily at stake here. What is shocking is the level of this reward. How can we explain it? Is this a relevant management practice?
In the United States, managers earned on average 254 times more than their employees in 2021, compared to 238 times in 2020. A level close to that observed in France. However, if the absolute level of this difference can legitimately shock, it is especially its evolution during the last decades which constitutes the most surprising phenomenon.
Indeed, this gap was only 1 to 20 in the United States in 1965. It was also the maximum pay gap recommended, at the beginning of the 20thand century; the famous banker JP Morgan, little known for his egalitarian activism. What can explain such inflation? It is certainly not a proportional increase in the talent and responsibilities of the big bosses: whatever indicator is chosen, there is no indication that the performance of the leaders (and the companies they lead) has multiplied by 20 since the 1960s.
Consanguinity of advice
In fact, the explosion in the compensation of managers of listed companies is explained by the conjunction of two perverse effects. The first is the consanguinity of boards of directors and supervisory boards, known in France by the sweet name of “barbichette”, in reference to the nursery rhyme “I hold you, you hold me by the goatee”, which becomes: ” You are a member of my board, you vote my compensation, I am a member of your board, I vote your compensation”.
To legitimize executive compensation, some argue that there is a “market” for talent and that compensation, however exuberant it may be, would correspond to the “market price” of skills. However, if such a market exists for the leaders of large groups, it is certainly not a free market and the price there is certainly not an objective measure of value. Indeed, the boards of directors of listed groups are often made up of individuals who are themselves leaders and who often sit on several other boards.
There is therefore a form of collusion more or less displayed between the managers and those who evaluate their action and decide on their remuneration. Moreover, this situation is not specific to French capitalism (although collusion between alumni of the same Grandes Ecoles and the same Grandes Corps tends to reinforce it), since it is found, for example, in the United States.
We can thus explain the level of remuneration of the big bosses by the fact that they attribute it to themselves, through their administrators with whom they share the same interests and the same networks. However, if this phenomenon can make it possible to understand the amount of remuneration, it does not explain their multiplication since the 1960s. The endogamy of the instances of power is as old as the world, and nothing indicates that it is worse today today than it was yesterday.
“Lake Wobegon effect”
To explain the explosion in executive compensation, we must therefore invoke a second perverse effect, much more formidable because it is largely counter-intuitive.
It was from the 1990s that the regulations gradually imposed disclosure of the levels of remuneration of the managers of listed companies. In the United States, this took the form of a new rule enacted by the Securities and Exchange Commission (SEC) in 1992. In France, it is the law relating to new economic regulations (known as the NRE law) of May 15, 2001 , revised by the financial security law of 1er August 2003, which set this framework.
In both cases, the objective was the same: to better inform shareholders about executive compensation, with the underlying assumption that if this compensation became public, it would remain contained. However, paradoxically, it is exactly the opposite that has happened: it is the publication of salaries that has caused their inflation.
Indeed, as soon as the remuneration is public, it becomes a measure of the value of the leaders and therefore an issue. As long as it was secret, it did not make it possible to compare individuals and therefore remained a purely private matter. Having become public, it imposes itself as the standard of their talent. When a listed company appoints a new leader and decides to pay him less than his predecessor, everyone knows it, and we will deduce that he is not as capable as the one he replaces. Similarly, if the leader of a company is paid less than the average for his industry, everyone knows it, and we will deduce that he is not among the most talented.
It is because the remunerations are public that all the leaders seek to earn more than the average and that all the boards of directors do not stop paying them better: a director who would publicly doubt the competence of the director would cause a collapse of the price of action. Conversely, to positively influence shareholder value, a board of directors has an interest in giving all the most patent, measurable and visible signs of the extreme confidence it has in the exceptional talent of the manager: this is what he does when he decides to increase it. Therefore, once public, executive compensation becomes instrumentalized as both a measurement tool and a mechanism of influence.
The phenomenon of instrumentalization of the mean is known in the United States as the “Lake Wobegon effect”, named after the fictional town of Lake Wobegon, where as legend has it “all women are strong, all men are handsome and all children are above average”. If it is impossible for everyone to be better than the average, the fact that everyone seeks to be so causes their inflation.
A recent anomaly
What to remember from all that? In the light of history, the explosion in the remuneration of the bosses of large companies remains an anomaly, and it is a recent anomaly (the French economist Thomas Piketty condemns a “meritocratic extremism”). From a managerial point of view, the current levels of remuneration are not justified, because for a long time companies have been very well managed without their bosses being so handsomely paid.
Moreover, such pay gaps cause a deep feeling of inequity, at the risk of general demotivation, which is much more detrimental to company performance than a very hypothetical erosion of executive talent. As American billionaire Warren Buffett slyly puts it: “When a leader with a reputation for excellence meets an industry with a reputation for difficulty, it’s usually the industry that retains its reputation.”
Therefore, if we want to put an end to this historical anomaly that is the explosion of the salaries of big bosses (or that of movie stars and sports champions), the obvious conclusion is clear: we must make these salaries secret. As soon as they are secret, they will cease to be a measure of the value of individuals, and therefore to be a stake. Of course, nothing says that by becoming confidential, remuneration will go down to more reasonable levels (for that, the law would have to impose it or the shareholders would have to demand it), but at the very least, they will have fewer reasons to increase.
Remains a major obstacle: it is difficult to see how public opinion, scandalized by the current levels of these remunerations, could accept that we decide to hide them. I invite our most pedagogical readers to solve this thorny problem.
This article is republished from The Conversation under a Creative Commons license. Read the original article.
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