Microeconomics: IB Economics

Your annual reminder from the High Pay Centre of the extent to which executive pay is utterly ridiculous, with FTSE 100 CEOs having earned more than the average worker by Tuesday lunchtime. Not bad work if you can get it, assuming that most CEOs have only been working since Monday morning; I don't think the assumption that they started on 2 January is a credible one.

I'd love to be able to tell you that this is explicable with the help of economic theory, unfortunately, MRPL theory falls a long way short of this. And yet we're still obliged to teach it.  

Hats off again to Nils Pratley for being critical of Anglo-American's attempt to pay its Chief Executive an inflated merger bonus, and in doing so, subvert its own remuneration scheme, and turn long-term performance-related pay scheme.

It's hilarious how some company's seem to think that finding convoluted ways to pay their Chief Executives more is justifiable, and not just indicative of the fact that it's not. As a thought experiment, how would you react if I suggested that as an Economics teacher, I wasn't paid a salary by the school, but a firm set up by me to control my image rights, received image rights for appearing in school publications if that meant I paid a lower rate of tax.

If you think that would be 'cunning' or a good thing, then you have a different view of how I should be paid than I do.  

It seems that the regulator has some power to limit the bonuses of water company executives but it's far from perfect. As a result, they are trying to regulate payments from parent companies to CEOs too, such as that which has been rumoured to be made to Yorkshire Water boss, Nicola Shaw. 

Quite what motivates firms, or the CEOs themselves, to think that this is a good idea is beyond me. Sometimes the line between legality and ethics is blurred...

My favourite topic: executive pay. And quite staggering hypocrisy here from a man who the 'market' deems is worth £10.5m and whose salary has doubled..

I'm fairly sure that there are some public sector jobs that are overpaid. but I'm also sure that the same applies to the private sector. And as for causality, I'm not sure that higher public sector pay drives private sector pay higher. I'd actually go as far as to suggest the opposite. Still, if CS Venkatakrishnan wants to explain MRPL theory to me, I'm all ears. 

The mutual nature of the Nationwide makes this discussion of executive pay a little bit more interesting than most - should Debbie Crosbie be receiving a £7m salary, or does this run contrary to the interests of the society's members? 

It's why CEOs earn the big bucks. with Chris Weston having the insight to suggest that Thames Water is in a spot of bother. I simply won't comment further. It's too easy.

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. 

Economics is all about incentives and this is a lovely example of something that should have been done many years ago. However, the Water Act has been revised so that executive bonuses are contingent on meeting environmental and consumer standards. 

As a result, six companies have been banned from paying bonuses from April 2024 onwards - Anglian Water, Southern Water, Thames Water, United Utilities, Wessex Water and Yorkshire Water. Of course, the danger is that companies will simply boost base salaries. 

If the government were really serious about it, they might even consider using the justice system - after all, last time I looked fly-tipping is illegal.

Regulation in action - but watch this space. OFWAT has issued a record fine to Thames Water for breaching both waste water standards and dividend payments. This might ultimately trigger the collapse of Thames Water, and certainly if that's the case this is exactly what the company will claim.

Of course, it's not the years of over-remunerated chronic mismanagement that's to blame. The board and the company's executives should hang their heads in shame. 

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. 

More on Thames Water's appearance before the Environment Select Committee - not only does cashflow look like a real issue but, surprise, surprise, it seems that a number of executives are on for sizeable bonuses of “50% of salary, very substantial bonuses”, with the CEO potentially going to be given a bonus of up to 156% of salary. 

And yet, there he is ask for clemency from the regulator. Shameful. 

Yesterday the High Court ruled in favour of Thames Water ruled in favour of beleaguered Thames Water, allowing it to take out a £3bn loan at an extortionate 9.75% interest rate, something that had been opposed by its creditors. 

Thames argues that the loan is needed to kickstart a restructuring of the company, and at present it's also campaigning to increase its bills by 53%, well above the 35% cap on bills rising in the next five years. Critics argue that it's effectively just kicking the can down the road, and pouring more money into a company that, ultimately, is going to fail. Either way, you can be sure that its executives are going to be extremely well-rewarded.

Industry body, Water UK, has announced that water bills are going up by an average of £123 per year from April, at a time when the companies themselves are being criticised for poor performance, not least environmentally.

The rise is the process of protracted negotiation between the companies and the regulator, and balances consumer interests and need of the water companies to finance investment. 

However, it will be interesting to see how much of this increase will be swallowed up by higher salaries for the companies executives. 

One of my favourite topics - executive pay - is in the spotlight again, with the Investment Association warning that firms should avoid benchmarking to justify increasing executive remuneration. Their warning is supported by the High Pay Centre, who clearly feel that far from being the competitive market that we try to portray, it's far from that. 

I leave this her without comment. It defies explanation. 

Executive pay at its finest. Is Elon Musk worth a $1 trillion dollar pay package? Can you argue both why he might be and why he might not be? It seems that key institutional investors are divided upon the issue. 

Naturally, Musk himself is shy and retiring...

The Guardian is linking the lack of transparency surrounding the boss of Yorkshire Water's salary is symptomatic of an industry that simply doesn't work in consumer interests. As far as it is concerned, the case for renationalisation isn't open to debate, although it doubts whether the current government has the stomach for the fight. 

Is this an example of regulatory failure? It looks the regulator is failing to align the incentives of water companies executives and their environmental obligations. If they linked executive pay to environmental goals there would be a distinct change of behaviours. 

It's almost as if Thames Water's executives genuinely think that the company is too big to fail, in not seeking to claw back £2.5m in bonuses paid to executives it's almost as if it's willing the government to intervene and then blame the collapse of the water company on this. 

Either I'm unduly cynical - it has been known - or it's not an entirely unreasonable supposition.

Oops. The boss of Thames is - no pun intended - in hot water, after it was revealed that the beleaguered company has already paid out over £18m in bonuses to 21 executives. Of course, as far as the company's concerned they are 'retention bonuses', so that's OK then because the company claims that "None of the retention payments have been funded by customers". 

So where they got the money for that is anyone's guess. Presumably Sajid Javid's magic money tree. 

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. 

Nils Pratley on Thames Water's retention bonus scheme. 

He's correct in asserting exactly who the prats are, and why such a scheme is currently indefensible - and why even under normal circumstances it would still seem odd. 

I wasn't aware that my 'scoops' are now influencing policymaking - however, the Environment Minister is considering permitting the regulator to intervene and prevent water companies paying their executives bonuses if they under-perform. 

And as for the notion of a retention bonus? Thames Water really have been plumbing the depths this week, no pun intended...

An important point to remember when looking at how industries are regulated is the fact that the regulator is almost always the second mover. The industry does something, it has adverse effects and only then does the regulator act.

Shouldn't this sort of thing have been thought of earlier? You would have thought so, but the prospect of fining executives no shifts the goalposts and seems to better align incentives to reduce chance of environmental damage, if this is what the powers are going to be used for.

However, I also worry about the phrase "criteria of OFWAT's choosing"; for me, it's too vague and creates uncertainty, which might reduce investment in the sector, or, alternatively, see some activities being over-consumed. 

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...