Microeconomics: IB Economics

I simply leave this here, with little in the way of comment. 

Can such wage differentials be justified? 

My only substantive observation though is that the idea of a maximum wage is really bad economics - it will have no effect on executive pay because all it would do is incentivise firms to find ways of working around such a restriction. 

This Guardian article is an excellent look at the nature of the UK's labour markets and wage determination in the current economic environment. 

The article starts from the premise that workers now have more power than they've had for most of the recent past, and the suggestion is that workers with digital skills are able to command a premium and they are being well-rewarded for them.

Sometimes the behaviour of certain individuals beggars belief. This is one of those occasion; well-remunerated executives feel justified in claiming 'substantial' bonuses when their company is on the point of going bankrupt. 

The firm claims that this would help 'retain senior managers'. Perhaps you might consider that your previous senior managers have been a significant part of the problem. 

I'm struggling to post this Guardian piece on the potential struggles facing Thames Water in recruiting its executives. I kid you not, but the firm has told OFWAT that its plans to limit bonus payments to its executives will starve it of 'talent'. As a result, they might seek to increase base pay "to compensate for the loss of performance-related pay plans”.

There are all sorts of ways that you might use this article as a starter, not least in asking what determines the pay of people in a given profession, before moving on to consider whether water company executives are in danger of being under-paid or not. 

Thames Water might also want to give me a call - depending upon whether or not I'd be willing to accept the Chief Executive, Chris Weston's current £850,000 salary, with a performance-related bonus that could see him earning £2.25m over the year. (For reference purposes, it would see Mr. Weston take home in a year, more than I'm likely to earn in my entire career!)

This article is largely anecdotal: it looks at the life of one Icelandic teacher and how a shorter working week - 36 hours instead of 40 hours has affected the economy. The conclusion? It's increased productivity, reduced stress, increased job satisfaction and had many, many more benefits for both the individuals and the wider economy. 

It seems remarkable that the federal minimum wage has remained at $7.25 since 2009. However, there are a number of nuanced arguments that suggests that a new federal minimum wage might be introduced.

But the reality is that many cities and states have their own minimum wages, with state-level minimum wages varying to reflect local labour markets. However, will a higher minimum wage have a positive effect? 

On one hand, it is likely to increase worker productivity and reduce labour turnover, but might it increase costs and business failures and encourage pay increases elsewhere in the labour market?

A Guardian editorial looking at high executive pay, its fundamental unfairness and the lack of any rational basis for its award. 

And a tip: "The Way We Live Now" by Anthony Trollope is a fantastic book about the super-rich and well worth your time. 

I'll leave this here - the annual survey from the High Pay Centre shows that executive pay is ever-more divorced from that of the average full-time worker. 

Followers of this site know what I think and also my response to the fact that "Soriot has defended his pay packet by arguing that it is important to attract his potential successor to the company by showing that the UK is a leading destination for the life sciences industry, while the company’s chair has said the deal will help stop the chief executive from quitting for a role in the US."

In this first case, are there many people who won't get out of bed for less than a £17m salary, and in the second, let him...

It seems as though jobs that require AI skills are now earning a wage premium, with people in those sectors earning 14% more than other workers, because these skills boost their productivity. 

Executive pay: I love hearing the justifications for paying Chief Executives large sums. In this case, Ken Murphy, the CEO will see his pay and bonus package double to £10m. Put in simple terms that's £38,451.54 per day, far higher than the average income in the UK, and indicative of the fact that Mr. Murphy is clearly many hundreds of times more productive than the ordinary worker. 

At least the High Pay Centre recognises the lunacy of these sort of pay packages. 

Anyone who follows my board knows my feelings on this: a £4m pay rise for factors over which you've no control. taking total pay to £8.2m. How can labour market theory justify this?

I'd rather the Chair of Centrica's remuneration committee say nothing than come out with the utter nonsense that is "the company needed to attract and retain 'high performing executives who can lead this large and complex business'. She added that his pay was "based on the terms he was appointed on", and that 'the structure of the package was approved by our shareholders, and it is consistent with similar companies".

At least say "that moustache doesn't wan itself"; that, to my mind is more economically coherent.

It's tough being a UK-based CEO, with the average salary of UK-based chief executives a mere £4.4m, in comparison with the £13.1m they could be earning in the US.

Once again, we get the scarcely credible "world class talent" argument - which is spurious in the extreme. If UK bosses were genuine world-class talent, they'd already be working in the US, and if those who remain are world-class, it strikes me as coincidental that many of them have near-identical backgrounds, as middle-aged, privately-educated white men with an Oxbridge degree. 

However, I'm delighted that the High Pay Centre has also highlighted adverse effect of absurd levels of remuneration on the ordinary workforce. In almost every facet of life, executive pay has accelerated away from average pay, and as an Economics teacher I have to say that whilst there are some justifications for this, they rarely stand up to anything resembling close scrutiny.

They're as rare as hen's teeth, but, at last, a CEO with the guts to say it. "I can't justify my pay of £4.5m". 

A friend of mine worked with him when he was CFO at Centrica and vouches that he's a personable, smart chap. But £4.5m buys a lot of moustache wax. 

I scoop this, unsurprisingly, because it's one of my favourite topics and because I think it provides an interesting starting point for discussing labour market theory. 

Even more interestingly, although I'm generally opposed to such obscene bonuses, I also have a degree of respect for Michael O'Leary and how he's transformed Ryanair from a small regional airline. However, 100m euros strikes me as an unreasonable bonus - not least because in part it's been accrued on the back of the effort of Ryanair's notoriously poorly paid staff. 

I also think that his point of comparison with Premier League footballers is inappropriate; I don't think that the notion of 'superstars' earning economic rent applies to business. Most Chief Executives are interchangeable and don't have a unique skillset. However, does the bonus reflect his marginal revenue product over time? Worth discussing. 

One of my favourite topics - executive pay - is raised by this article that illustrates the extent to which labour market theory is increasingly nonsensical. Thames Water has announced that it is pausing its retention scheme - or bonuses - which amounted to 50% executive pay packets, in the face of public criticism.

How does someone already earning a seven figure salary justify a £1m bonus when the firm itself is £20bn in debt? And as for the utter guff spouted by Thames CEO, Sir Adrian Montague ""We live in a competitive marketplace and we have to provide the right sort of packages to these people otherwise the head hunters come knocking,"  I'd beg to differ. The nature of pay determination is imperfectly competitive, impossible to measure the MRPL of executives and, frankly, the history of Thames Water suggests that, in many instances. the headhunters would be welcome to employ these managers. 

I 'scoop' this prompted by an excellent High Pay Centre X thread highlighting the absurdity of some of the remuneration in this article.

Apart from the exorbitant pay for the CEO, and how can he alone be responsible for this uptick in performance, it notes that an average of £770,000 was paid to around 840 investment bankers a mere 1,500 times more than the £500 in shares paid to 90,000 ordinary employees. In contrast to the £1.9bn going to so-called outstanding performers, the latter would have cost £45m. 

I can't see the underlying economics that explains this - or rather I can but it bears no resemblance to any reality that I can easily communicate to me pupils...

The annual reminder that executive pay is such that FTSE 100 bosses will have made more money by noon today than the average worker makes in a year. Because they're worth it. 

And economically justifiable, according to labour market theory, something I find difficult to reconcile. 

Executive pay in the spotlight again: and yet another excecutive demonstrating his tin ear for wider criticism arguing that “Executive compensation [last year] was the lowest level since 2011, down 35% year on year,” she said. “We [Mahon and Allan] took significantly reduced bonuses in line with [Channel 4’s] key performance indicators and how the remuneration committee decided to award it.”

I'd hate to think how much she would have earned had the broadcaster been excelling. And how might you measure the productivity of the boss of a broadcaster? 

Although the IB doesn't look at labour market economics, I think that this article is worth a read, simply because it's interesting. What effect has working from home had on productivity?

Amazon have told their staff that they must all return to their desks five days a week, but that's not true of all firms, not least because, empirically, more flexible working will affect different people, and firms, differently. 

You might have a think about this issue and whether you'd want to work for an organisation that insists on you being in the office five days a week.

More on executive pay - with the Guardian trying to explain why executive pay has grown much more rapidly that average pay. 

Apparently, it's due to Brexit, the fear of losing UK-based executives to the US and other factors - a changed corporate culture and weaker trade unions. And strange to relate, there's no mention of productivity of marginal productivity theory. 

Nils Pratley echoes my thoughts: how can the salary of the boss of British Gas be justified, given that it's almost entirely the result of a rise in wholesale energy prices. 

Nils Pratley looks at the pay deal offered to the CEO of Smith & Nephew, Deepak Nath, and the accompanying shareholder rebellion and treats the award with the contempt it deserves.

A number of UK-listed companies are known as "British in listing only", and their CEOs operate in the US, where executives are more highly paid. But it doesn't necessarily mean that these UK-listed companies need pay them the same absurd rates. 

As is pointed out - "the system is a racket" - and I'm currently grateful that I don't have to teach it at IB; it simply defies economic logic. 

And here's a classic example of the ridiculousness of executive pay - rewarding a chief executive on the basis of targets that are largely exogenous, scarcely reflect his productive input and don't reflect the productive contributions of the ordinary Unilever workers.  

An unusual story about labour productivity, with news that - stretching the headline to its limit - the majority of the 61 firm trialling a 4-day week have made in permanent. In this case, that means 31 of them - the majority, but only just. 

A number of other firms are continuing with the trial but it seems that in many occupations the 4-day week can concentrate the mind, making workers more productive and producing 100% of their output in 80% of the time.