Does competition really eliminate bad bosses?

30 Aug, 2017 at 17:31 | Posted in Economics | 3 Comments

But what of the argument that competition eventually eliminates bad bosses? True, it does sometimes; the relatively egalitarian John Lewis Partnership has done better than department stores such as House of Fraser or Debenhams, for example. But market forces are weak (and perhaps getting weaker).

One reason for this is simply state intervention; without this, almost all shareholder-owned banks with their high-paid CEOs would have vanished.

Another reason is that there isn’t really a properly-functioning market for CEOs. I own tens of thousands of pounds of shares, but I’ve never been asked to vote on a CEO’s pay. Instead, the vote is exercised by fund managers many of whom are more bothered by the relative performance of their funds than absolute performance. We have widespread agency failures in which mates pay each other. And as Milton Friedman said:

“If I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get.”

Unsurprisingly, then, there is little clear link between CEO pay and corporate performance. It might be that high pay is better explained by rent-seeking than as a reward for maximizing shareholder value – though as it’s almost impossible to know in most cases what constitutes maximal value, we might never know for sure.

In fact, my analogy with feudal lords is too generous to CEOs. Whereas (arguendo) a bad lord would pay for his incompetence perhaps with his life, bad CEOs walk away with fat pay cheques.

When so-called free marketeers try to defend bosses’ pay, they do the cause of free markets a huge dis-service by encouraging people to equate free markets with what is in effect a rigged system whereby bosses enrich themselves with no obvious benefit to the rest of us.

Chris Dillow