Microeconomics: IB Economics

Here's a conundrum for free market economists. Is there a justification for Denise Coates having earned £270m in salary and bonuses in the past year? 

We're meant to believe that pay is determined by the marginal productivity of the worker. So does Ms.Coates have a daily marginal revenue product of £1m? I'd love to know your thoughts.

Is this another example of where the reality of labour markets deviates from labour market theory, with the Social Mobility Foundation reporting that class-based discrimination means that being working-class means that even those in professional roles earn less than their peers. Well, it's only fair, they're less likely to be paying public school fees.

Factor in the combined effects of this and other forms of discrimination - gender-based and ethnicity-based - and the case for teaching labour market theory are objective is ever shakier. 

Another year, and, surprise, surprise, executive pay is still streaking ahead of average pay.

And yet again, the Today Programme commentator spouts the usual nonsense about a "narrow talent pool" - is it? Are there more or less graduates than 30 years ago? Is the talent pool more or less international? 

And the usual comment that executive pay increases are roughly in line with those for the rest of the workforce - but 7% of £2m is far more that 7% of £30,000 and this will only ensure that the pay gap widens.

But the kicker is that, apparently, these people are "aware" of what others are being paid - and hence it is this that drives executive pay,  upwards. And then the usual comparison with "Premiership footballers", equally unjustified. Premiership footballers are objectively better than other footballers. There's no comparable form of assessment of executive performance. 

Honestly, one this one issue, economic theory is, to my mind, flawed and propagating uncritically is utterly disingenuous. 

Yes, you might argue, it's the Guardian. But reading this just highlights the fundamental unfairness of some executive pay deals; the CEO of Centrica is going to pick up £4.5m this year - comfortably more than I will earn in my entire working life for a job where, no doubt, he's worked hard. 

However, he reward has little to do with his efforts and an awful lot to do with circumstances utterly beyond his control, i.e. the war in Ukraine. 

Those who argue that high pay is a reward for high productivity are really going to have to work hard to sell this to me. 

Lots of entry points: labour market theory, costs and revenues and equilibrium positions, and market structure. Pret A Manger have increased wages for a third time this year, reflecting other retailers, in response to the ongoing labour shortage.

It seems that there is a high level of competition for workers in both hospitality and supermarkets right now. 

I told you that executive pay isn't determined by efficient labour markets, with the author, Alexander Pepper arguing that instead executive salaries are a function of market failure. I'd have to say that I agree with his analysis. 

The Resolution Foundation's Torsten Bell unpicks the cause of high pay for bankers - a piece of Swedish research suggests that high pay has little to do with intelligence, and much more to do with a lack of competition within the market for bankers, and their ability to extract higher rewards from higher profit.

The High Pay Centre are reporting that pay gaps between bosses and workers are going to widen this year, having narrowed slightly over the pandemic. It's one of those areas of economics where I'm of the view that there's little basis in economic principles for this - but hey ho!

A poll for the high Pay Centre reveals that a majority of Britons appear to want executive pay capped - and reveals some interesting data.

Presently, the bosses of Britain's largest 350 companies get paid 53 times more than the median employee, with 43 of them receiving more than 100 times more.

However, does bringing in a maximum ratio, such as 10 times the earnings of the median employee make economic sense? And is there an optimal solution to this? Libertarians would argue that any attempt to legislate in this way is fundamentally wrong, but at the present rate it would seem that income, and by definition, wealth inequalities are simply going to widen. And does this reflect CEOs becoming more productive than the rest of us? I'd doubt that.

Aha! One of my favourite topic areas - largely because the underlying economics behind it is so feeble - executive pay.

In instance, the CEO of BP, the delightfully named Bernard Looney saw his pay nearly double in 2021 to £4.5m overall. Of course, he's become nearly twice as efficient and the pay increase has nothing to do with the state of the global oil market, something that he's got absolutely no control over whatsoever. 

For those people in receipt of the living wage, around 300,000 employees, they will be getting a pay increase as of today. 

Which begs that question why do firms voluntarily offer to pay the Living Wage? You might start by thinking about marginal productivity theory, and then about other factors that explain this, such as lowering staff turnover and so on. 

Is this the beginning of the end for the command economy in Cuba. In response to last month's protests, private firms will be allowed up to 100 employees, and a number of other measures, including a removal of some trade restrictions, mean the economy is opening up.

It will be interesting to see what this means for the economy: are workers going to want to be state employees, and have their wages determined by the state, or work in the private sector, where theory would suggest that pay will reflect their productivity?  

One of my favourite topics - executive pay - is in the spotlight with the news that Bet365 have paid their Chief Executive, Denise Coates, a mere £421m in 2020. It's remarkable to note that this is more than every other FTSE 100 executive combined. Looked at another way, that's £48,000 per hour - and brings her total earnings to more than £1bn in the last four years.

This just makes absolutely no sense - not least because in the period being reported, the company's revenues fell by 8%, although they are forecast to rebound in the last financial year. Can economic theory really support the notion that the size of her reward is determined by her marginal revenue product? 

One of my favourite annual 'scoops' revealing the shaky foundations of labour market theory - by lunchtime today, the average FTSE100 boss will have earnt the average UK salary in less than three working days. Of course, the theory will tell us that there's a market for talent - and that they are paid in line with their productivity. 

All of which would be fine, until you consider the extent to which these executives and those that the work in the City are British, and ask how their productivity is measured. Their salaries don't reflect either - unless the market is just a proxy for the amount that they negotiate with a remuneration committee who pull a figure out of their air based on their own salaries, and those in comparable jobs, and don't get me started no measuring their productivity. I'd rather see executive pay as akin to a lottery win....

This is an interesting story, in large part because the implementation of the cap didn't really alter City salaries all that much, with banks raising basic rates of pay. 

However, what I'm struck by is the rhetoric used to justify its removal, which focus on the usual tropes of "competition for talent" and so forth. It's utter rot. Competition for talent? Why is 85% plus of the talent in the City British-born (and why, for that matter, did so many of them go to such a small list of schools?).

As ever, we can justify high pay to incentivise executives, but woe betide anyone who suggests that we ever raise benefits. 

Difficult not to disagree with every word that Nils Pratley writes in this piece: UK executives are already exceptionally well remunerated and the pay ratios at most FTSE 100 firms are far from equitable, and certainly don't reflect productivity. The fact that the boss of LSE thinks otherwise is exactly the sort of thing that creates the impression of an 'out of touch metropolitan elite'.

I'll just leave this story on executive pay here.

Make of it what you will...

An interesting, and depressingly familiar tale about pay in the UK. The pay of bankers have increased three times as quickly as that of nurses.

What drives that? Productivity? Profit in the sector? Or does labour market theory no longer really explain pay determination?  

One of those stories that will divide people, although I suspect that most economists would argue that scrapping the cap on bonuses removes a market imperfection.

However, is this a good idea? From a political point of view, I think it odd that this is seen as a priority during a cost of living crisis. From an economic point of view, is there any evidence to suggest that it will incentivise increased investment in the UK or enhance productivity? Also, you might wonder about whether bankers' bonuses are market-determined? If you think they are, then scrapping the cap would seem reasonable. However, if you think that the market plays only a small part in determining bonuses you might make a case for the cap remaining in place.

I'll just leave the US data on executive pay here.

670 times more intelligent/harder working/productive? 

Regular viewers of this site will know that executive pay is one of the areas I find most perplexing, and this article gets me thinking. Does executive pay in the energy sector reflect productivity? Or is the article just an example of the 'politics of envy'?

Well, I would argue that this article just shows that neither might be true - can the chief executives of BP and Shell genuinely say that they were significantly more productive last year than they were the previous year. Indeed, given Bernard Looney's contention that his business was a "cash machine" neoclassical economics might even go as far to suggest that this might reduce his incentive to work hard, so he could be earning more being less productive. 

It seems that executive pay might have become a minor issue in the French General Election - with Emmanuel Macron calling for pan-European action after the head of Stellantis, the French car maker, received a 19 million euro remuneration package last year.

It's a fascinating area of economics - and my inclination is that there's no easy solution to it - until, of course, as a society we accept that the people who become CEOs do so largely as a result of 'luck' rather than their own 'productivity'. But is government intervention a way forward? Probably not, if only because it creates incentives for individuals and firms to work around it. And don't get me started on the 'talent' argument - to attract the best talent in global markets - I don't think it's remotely valid. 

The issue of executive pay raises its head again, with the news that the total remuneration package for Tim Cook is going to reach £73m.  Put another way, that's just over £280,000 per day - and that's not including holidays. 

The more able of you might be able to look beyond the obscene amount of money involved and volunteer a defence of such a pay deal; however, I suspect you'll be in the minority. 

One of my favourite topics - executive pay is highlighted in the annual High Pay Centre investigation into the extent to which CEOs do better than the rest of us. 

In short, the bosses of the UK's largest public companies on average earn 86 times more than the average worker: some earn considerably more. You might think about the reasons for this and whether such a disparity is justified. 

I'll just leave this here - is executive pay really market determined? If so, can you use economic analysis to explain this story in today's Guardian?