Why Big Boss Salaries Are Exploding

As every spring, with the publication of the reference documents of listed companies, the remuneration of big bosses provokes indignant reactions. This year, a study by Fintech Scalens, a platform specializing in services for listed companies, showed in particular that the leaders of the CAC 40, the forty most valued companies on the Paris stock exchange, saw their compensation double in one year, reaching an average of 8 .7 million euros. Same uptrend in the US: Top 100 US executives saw their pay rise 31% in 2021 to around €20 million per person on average (including +569% for Apple boss Tim Cook, or up to +65 % for Goldman Sachs).

One name in particular caught the attention of the French press: that of Carlos Tavares, general manager of the Stellantis automobile group (born from the merger between Fiat Chrystler and PSA Peugeot Citroën), who was supposed to receive 66 million euros in total compensation. 2021, including a fixed tranche of €19 million. This figure, made public during the middle rounds of the presidential campaign, was considered “shocking” by both National Rally candidate Marine Le Pen and presidential candidate Emmanuel Macron, who also called for a ceiling on executive pay at the European level. .

The case of Carlos Tavares, in fact, seems all the more controversial since, under the mandate of François Hollande, a law was adopted so that the employer’s remuneration is subject to shareholder approval. On April 13, the latter also opposed the payment of 66 million euros at the group’s general meeting. But the vote took place at the new headquarters located in the Netherlands, where this vote has only an advisory function…”

A performance correlation

During the Stellantis group’s general meeting, chairman John Elkann justified this level of remuneration by explaining that he wanted to “reward the performance” of the manager who carried out the merger between Fiat Chrystler and PSA Peugeot Citroën.

However, the question of rewarding success financially, while it has been widely debated in psychology since Edward Deci’s seminal work, is not what is at stake here. What is shocking is the level of this reward. How can we explain it? Is this a relevant practice in terms of management?

In the United States, managers earned an average of 254 times more than their employees in 2021, compared to 238 times in 2020. A level close to that observed in France. However, if the sheer level of this difference can legitimately shock, it is above all its evolution in recent decades that constitutes the most surprising phenomenon.

In fact, this difference was only 1 to 20 in the United States in 1965. This was also the maximum wage gap recommended in the early 20th century by the famous banker JP Morgan, little known for his egalitarian activism. What can explain this inflation? This is certainly not a proportional increase in the talent and responsibilities of the bosses: whatever the indicator chosen, there is nothing to indicate that the performance of leaders (and the companies they lead) has multiplied by 20 since the 1960s.

Consanguinity of the boards of directors

In fact, the explosion in the remuneration of managers of listed companies is explained by the conjunction of two perverse effects. The first of these effects is the consanguinity of the management and supervisory boards, known in France by the sweet name of “barbichette”, in reference to the lullaby “I hold you, you hold me by the goatee”, which becomes: “you you are a member of my board, you vote on my compensation, I am a member of your board, I vote on your compensation”.

To legitimize executive compensation, some argue that there is a “market” for talent, and that compensation, no matter how exuberant, corresponds to the “market price” of skills. However, if such a market exists for the leaders of large groups, it is certainly not a free market, and price is certainly not an objective measure of value. In fact, the boards of directors of the listed groups are often made up of individuals who are leaders and who often sit on several other boards.

There is, therefore, a form of collusion more or less manifested between managers and those who evaluate their performance and decide on their remuneration. This situation is not specific to French capitalism (although collusion between former students of the same Grandes Écoles and the same Grandes Corps tends to reinforce it), as it is found, for example, in the United States.

We can thus explain the level of remuneration of the big bosses by the fact that they attribute to themselves, through their administrators, with whom they share the same interests and the same networks. However, if this phenomenon makes it possible to understand the value of remuneration, it does not explain its multiplication since the 1960s. In fact, the endogamy of instances of power is as old as the world, and nothing indicates that it is worse today than it was yesterday. .

“Wobegon Lake Effect”

To explain the explosion in executive pay, we must therefore invoke a second perverse effect, much more formidable because it is largely counterintuitive. It was from the 1990s onwards that the regulation progressively imposed the disclosure of the remuneration levels of the directors of listed companies. In the United States, this took the form of a new rule enacted by the Securities and Exchange Commission (SEC) in 1992. In France, it is the NRE Act of May 15, 2001, revised by the Financial Security Act of August 1, 2003 who fixed this picture.

In both cases, the objective was the same: to better inform shareholders about executive compensation, with the underlying assumption that if that compensation became public, it would remain contained. However, paradoxically, it was the exact opposite that happened: it was the disclosure of wages that caused their inflation.

Indeed, once compensation is public, it becomes a measure of the value of leaders and therefore a problem. While it was secret, it did not allow for comparing individuals and therefore remained a purely private matter. Having become public, it imposes itself as the standard of his talent. When a listed company appoints a new director and decides to pay him less than his predecessor, everyone knows it, and we deduce that he is not as capable as the one he replaces. Likewise, if the leader of a company is paid less than the average for his industry, everyone knows that, and we will deduce that he is not among the most talented.

It is because pay is public that all leaders seek to earn more than average and that all boards of directors are constantly paying better. Indeed, a director who publicly doubted the manager’s competence would cause the stock price to collapse. On the other hand, in order to positively influence shareholder value, a board of directors has an interest in giving all the most conspicuous, measurable, and most visible signs of the extreme confidence it has in the manager’s exceptional talent: this is what it does when decides to increase it. Thus, once public, executive compensation becomes instrumentalized both as a measurement tool and as an influence mechanism.

The phenomenon of instrumentalization of the media is known in the United States as the “Lake Wobegon effect”, named after the fictional town of Lake Wobegon, where, as legend has it, “all women are strong, all men are beautiful, and all children are above average.” If it’s impossible for everyone to be better than average, the fact that everyone tries to be that way causes their inflation.

A simple solution to a recent anomaly

What to remember all this? In the light of history, the explosion in pay for corporate bosses remains an anomaly, and it is a recent anomaly (French economist Thomas Piketty condemns “meritocratic extremism” in this regard). From a managerial point of view, the current levels of remuneration are not justified, since for a long time companies have been very well managed without their bosses being so well paid.

Furthermore, such pay disparities cause a deep sense of inequality, with a risk of general demotivation, which is far more damaging to company performance than a very hypothetical erosion of executive talent. As American billionaire Warren Buffett slyly puts it:

> “When a leader with a reputation for excellence encounters an industry with a reputation for difficulty, it is usually the industry that maintains its reputation”.

So, if we want to put an end to this historical anomaly that is the explosion in the salaries of big bosses (or movie stars and sports champions), the conclusion to be drawn is clear: we must keep these salaries secret. Once secret, pay will no longer be a measure of the worth of individuals and therefore a problem. Of course, nothing says that, by becoming confidential, the remuneration will fall to more reasonable levels (for that, the law would have to impose it or the shareholders would have to demand it), but at the very least they will have less reason to ‘increase.

A major obstacle remains: it is difficult to see how public opinion, scandalized by the current levels of these remunerations, could accept that we decide to hide them. I invite our most pedagogical readers to solve this thorny problem.


In Frederic FreryProfessor of Strategy, CentraleSupélec – University of Paris-Saclay

The original version of this article was published on The Conversation.