What does it take to get corporate bosses to do the best job possible? For Margaret Ewing, former finance director at BAA, high pay is one answer. She told the Financial Times that quoted companies are at a disadvantage to private equity because they cannot pay “sensibly” for taking strategic risks.
The kings of private equity, not to mention the emperors of the hedge fund world, certainly make a lot more money than the captains of publicly-traded industry. Josef Ackermann, head of Deutsch Bank, got a lot of flak in Germany for his €12 million (Rs64.8 crore) package, but that is a risibly small reward in the private finance world, where top earners take in a billion a year. It’s enough to make public company bosses feel like Oliver Twist, rebuked for asking for more gruel.
The evidence suggests that some of the best financial and business minds are indeed sufficiently money-hungry to go private. But simply paying public people more isn’t much of a solution, for two reasons. First, top pay rivalry is endless, because it is based on what philosopher Alain de Botton calls status anxiety. Boss A won’t be satisfied with a helicopter as long as boss B is flaunting his A380. And if Boss A gets a jumbo jet, Boss B will be buying up a fleet. Executive pay has increased dramatically in the last two decades, both relatively and absolutely, but the moaning that it is inadequate has only got louder.
Second, company bosses shouldn’t be paid simply for taking risks. They should be paid for balancing the company’s risk and reward. The promise of a gargantuan personal payout if a risky decision goes well is likely to unbalance the scale, especially if the boss bears little financial risk if it all goes wrong. Rather than giving some already fat cats more food, the rewards should be increased in a different currency—prestige. Shareholders would be well served if bosses directed their competitive instincts more towards their reputation than their wallets. It won’t be easy to change priorities in that direction, but investors, politicians and regulators should make the effort.