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The executives who are holding us for ransom

July 24, 2015

2-minute read

In a televised exchange with Michel Nadeau of the Institute for gouvernance of private and public organizations (IGOPP), I stated that public corporation executives' level of compensation functioned just like a ransom. The discussion heated up, and I did not have the chance to explain what I meant when I used that term. I would now like to take the opportunity to clarify my comparison.

One holds a person to ransom by demanding an astronomical sum in exchange for something he or she wants but does not have: generally a person that was kidnapped. The current salary of public corporation executives follows the same logic: first, the kidnapping, then, the ransom.

The Kidnapping

First, competency needed to be kidnapped. Well, not so much competency itself as how it is measured. It seems reasonable to believe that we can measure public corporation executives' capabilities according to relatively objective criteria and choose the applicants who fit the criteria. It seems therefore to be mostly a matter of setting the criteria and then to select those who best fit the bill.

This logic —which holds true for seemingly all jobs— no longer applies to public corporation executives: we now need to attract the best. What do is meant by "best"? Those who are the most expensive. Because, don't you see, the best executives are those that would receive the highest pay in the private sector.

From now on, an executive's competency in a public corporation is no longer valued as would be that of an engineer or of a simple white-collar worker. We no longer ask if he or she is able to do this or that task efficiently. His or her competency is valued according to his or her prestige in the private sector. His or her prestige is measured by the compensation he or she receives (or could receive) in the private sector. Hence, there is an ongoing battle to outmatch one another in terms of compensation, and therefore of prestige, and consequently in assumed competency.

The public sector no longer has to judge the competency of its best paid employees. This part of decision-making has been kidnapped: there is a "market" of executives to take care of that now. If the public sector does not reward its executives with princely fees, it will have to pass out on "the best". Because, according to this circular logic, the best are easy to spot: they receive the highest pay.

The Ransom

However, it's not entirely true that this salary-ransom is set by the market. As Thomas Piketty points out, the astronomical salaries in the private sector are rather set by cronyism: I serve on your company's board and I make sure you get a good compensation by praising your incomparable capacities, and you'll return the favour because you serve on my company's board.

An article published in 2014 (summarized in French and in English) studied large corporations between 1994 and 2007 and came to the conclusion that, in fact, very high incentive compensation breeds overconfidence in CEOs and incentivizes risk, leading them to make more mistakes that their lesser-earning colleagues do.

In short, executives' high compensation rates are not necessarily related to competency, but rather to bargaining power. Once competency valuation is handed over to a "market" controlled by the stakeholders, one simply needs to get recognition from one's colleagues —whether one is competent or not— to earn a share of the ransom.

This article was written by Simon Tremblay-Pepin, a researcher with IRIS—a Montreal-based progressive think tank.

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