Skip to main content

The City of London - where all bankers and lawyers are above average?

The Lake Wobegon effect was proposed some months ago as an explanation for Chief Executives' ever-increasing pay in the US. In Lake Wobegon (Garrison Keillor's fictitious town), all the children are above average.
The way it works is that all corporate boards want their executives to be above average. That cannot possibly be the case for everyone, but not to worry. Markets run on investor confidence and perception, so if a company gives its executives above average pay and bonuses, they will look above average, and this will make the company look strong. Hence an upward pay spiral.
Warren Buffett wrote in 2007: "CEO perks at one company are quickly copied elsewhere. “All the other kids have one” may seem a thought too juvenile to use as a rationale in the boardroom. But consultants employ precisely this argument, phrased more elegantly of course, when they make recommendations to comp committees."
Once the public has rumbled this, why don't companies get off the bandwagon and pay their executives a moderate reward for the job? Because, according to the analysis, a company that pays its executives moderately could be perceived as admitting that they are only average or below, which would harm its share price.
Taking this a bit further, it is argued that if lower-paid executives were in fact above average, they would have been poached by a company that is willing to pay more. So any executive that is lower-paid can't be above average.
But, I wonder to myself, as there are only so many banking jobs in existence, and if a lot of them are already occupied by average-or-below executives whose merits have been talked up by means of high pay, who are not going to be fired because that would involve the company admitting having been wrong, nor are they going to move in a hurry since they are already getting more pay than they merit, how do vacancies come up? Over to you, dear reader.
As I see it, the essential problem is that everyone involved in this process treats pay level as evidence of performance quality rather than looking at the actual performance itself. But looking at the actual performance is more complicated and difficult as well as presenting confidentiality problems, so most investors, I suppose, do not bother.
The Lake Wobegon effect has been blamed for the preposterous sums paid to some of the UK's top bankers who, it is now painfully obvious, were in fact worse than useless.
A similar thing happens in both branches of the English legal profession where lawyers with the chutzpah to demand silly money for their services often get it. This is then cited as evidence of brilliance.
It sounds a lot of nonsense doesn't it? Yet it is still happening.

Comments

Popular posts from this blog

My Remainer's Diary Day 299

For 298 days I have kept my #Remainer's Diary on Facebook. Two nights ago my FB account became inaccessible without explanation. So I'm back on Blogger.
Diary Day 299: the UK's Office of Budget Responsibility published its first Fiscal Risks Report, a 312-page tome, in accordance with a requirement introduced by Parliament in October 2015 that the OBR must produce a fiscal risks report at least once every two years. It is freely downloadable by anyone.  Fiscal is a fancy word for pertaining to government finances. Derivation: 16th century, from Latin fisc─ülis concerning the state treasury, from fiscus public money, the public purse. It is about government income and spending.  The Fiscal Risks Report refers to a wide range of "fiscal pressures", and says that the risks posed by Brexit "do not supplant the possible shocks and likely pressures that we have already discussed, but they could affect the likelihood and impact of many of them."  It states that imp…

ELDR news from Palermo

Here is my report back to Liberal Democrats who directly elected me (thank you!) to the party’s delegation to the European Liberal, Democratic and Reform Party (ELDR). The second Council meeting of 2011 (there are two annually) and the annual Congress took place in Palermo, Sicily on 23-25 November at the invitation of the Italia dei Valori (Italy of Principles) Party. There were resolutions and emergency resolutions proposed by member parties, too many to summarise here, of which the most significant was, I think, one from the UK Liberal Democrats on the prospect of war with Iran. The gist is that it expresses concern at military rhetoric, top-level consultations between military and political leaders and the stationing of military assets off the Iranian coast pointing to the possibility of pre-emptive attacks being launched by Israel and the USA against Iran., and it calls for steps to be taken in Europe to dissuade them. When the US military are still engaged in both Iraq and Afgha…

My #Remainer's Diary Day 300: constitutional crisis is coming

My #Remainer's Diary Day 300: I mull over a joint statement from the First Ministers of Wales and Scotland, Carwyn Jones and Nicola Sturgeon about the repeal bill. It says: “We have... put forward constructive proposals about how we can deliver an outcome which will protect the interests of all the nations in the UK, safeguard our economies and respect devolution.  “Regrettably, the bill does not do this. Instead, it is a naked power grab, an attack on the founding principles of devolution and could destabilise our economies.”  So a constitutional crisis that was latent ever since 23rd June 2016 is due to be thrashed out in Westminster debates.  A spokeswoman for the Maybot said she was not aware of a contingency plan for what might happen if Scotland or Wales refused legislative consent.  That is apart from the rows there will be about the bill's Henry VIII clause powers and putting human rights in doubt.  As the clock ticks, businesses act to protect themselves.  EasyJet announced…