Finance sector wages: explaining their high level and growth
Joanne Lindley, Steven McIntosh 21 September 2014
Individuals who work in the finance sector enjoy a significant wage advantage. This column considers three explanations: rent sharing, skill intensity, and task-biased technological change. The UK evidence suggests that rent sharing is the key. The rising premium could then be due to changes in regulation and the increasing complexity of financial products creating more asymmetric information.
Individuals who work in the finance sector enjoy a significant wage advantage. This wage premium has received increasing attention from researchers following the financial crisis, with focus being put onto wages at the top of the distribution in general, and finance sector wages in particular (see Bell and Van Reenen 2010, 2013 for discussion in the UK context). Policymakers have also targeted this wage premium, with the recent implementation of the Capital Requirements Directive capping bankers’ bonuses at a maximum of one year of salary from 2014.
Financial markets Microeconomic regulation
Bankers’ bonuses, banking, wages, Inequality, UK, regulation, asymmetric information, Executive compensation, Finance, task-biased technological change, ICT
Reforming CEO pay: Focus on the right dimensions
Alex Edmans 11 September 2014
Executive pay is a controversial political issue with big implications for firm performance. Although public debate focuses on the level of compensation – or at best its sensitivity to firm performance – this column argues that the key issue is its temporal structure. A well designed payment structure can align CEO incentives with long-term shareholder value. The authors recommend lengthening the vesting period of equity and options.
Executive pay is a high-profile topic on which almost everyone has an opinion. Many shareholders, workers, and politicians believe that the system is broken and requires a substantial overhaul. Despite being well-intentioned, their suggested reforms may not target the elements of pay that are most critical for shareholder value and for society.
Financial markets Labour markets
executive pay, corporate governance, Executive compensation, CEOs
Through the looking glass: CEO pay in China's listed companies
Alex Bryson, John Forth, Minghai Zhou 24 June 2014
Publicly traded companies are the engine behind China’s growth, which raises the question of how CEO compensation works under an interventionist state. This column presents an analysis of executive compensation in China and a comparison to the West. Chinese listed firms have incentive structures similar to those of the US; in this case, effective compensation policies seem to transcend political boundaries.
For many in the West China remains a paradox: a single-party Communist state with a vibrant, thriving economy set to challenge the US in the coming decade. Some have questioned the sustainability of the Chinese growth miracle in the absence of fully-fledged democracy and root-and-branch market reforms. But others point to state-sponsored decentralised market reforms over the past three decades as the key to China's success (Xu 2012).
Financial markets Labour markets
China, executive pay, corporate governance, Executive compensation, CEOs
Say on pay in the UK: Modest effect, even after the crisis
Ian Gregory-Smith, Steve Thompson, Peter Wright 24 March 2014
In 2003, the UK adopted a ‘say on pay’ policy, whereby quoted companies’ executive compensation offers have to be put to a shareholder vote. This column presents evidence that this policy has had a relatively modest impact on executive pay. A 10% increase in compensation is associated with an increase in shareholder dissent against the proposal of just 0.2%. However, remuneration committees representing the more highly rewarded CEOs are quite sensitive to dissent, provided it exceeds a critical threshold of about 10%. Shareholders do not appear more anxious about pay since the crisis.
The extensive academic literature on the growth of executive compensation has tended to polarise around one of two positions: the rents-capture view and the optimal contracting approach. These analyses lead to very different positions on the value of a ‘say on pay’ policy:
Frontiers of economic research Labour markets Microeconomic regulation Poverty and income inequality
voting, UK, executive pay, corporate governance, Executive compensation
Incentive accounts: A solution to executive compensation
Xavier Gabaix , Alex Edmans 24 June 2009
Many blame executive compensation for encouraging shortsighted risk-taking. This column argues that compensation should be structured so as to provide incentives consistent with the firm’s position and long-term interest. It proposes “incentive accounts” that it says would be superior to existing compensation schemes.
In an influential book, Bebchuk and Fried (2004) argued that executive compensation is set by managers themselves to maximise their own pay, rather than by boards on behalf of shareholders. Indeed, many commentators argue that executives’ pay schemes were major contributors to the financial crisis, encouraging them to take on too much risk and manage their company for short-term profit. In response, President Obama has proposed new executive compensation rules for firms seeking government aid.
incentives, Executive compensation