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Monday, 24 April 2017

'Excess' Pay: Executives and Footballers

One of the axioms set out in my book, NO CONFIDENCE: The Brexit Vote and Economics, is that intellectual property is the greatest source of wealth in modern society. Starting with the right to be a priest, to claim a kingdom, or to have the rights of a landlord, the pattern of legally defined invisible property pervades every aspect of the economy. Inventors can claim patents on genuine novelties and creative thinkers of all other kinds can claim copyright and various modern derivatives from that concept. Patents and copyright are defended by the state and its courts for a period which [by any stretch of the imagination] is long enough for the concept creator to be remunerated sufficiently for the idea; with the brightest and most popular ideas generating the most wealth for their creators [and/or for those who acquire the rights by legal means]. 'Pirates' who try to use the intellectual property of other persons ans companies and penalised, and in general the system works well. The firms selling the products and services that embody or incorporate legitimately exploited intellectual property have to tread a fine line in setting prices, to ensure that the product is affordable to a large enough market for the firm to optimise its profit. If the price is too high, not enough consumers are capable of buying it; but if the price is not as high as is reasonable for the market to bear the firm is wantonly surrendering profit that it could acquire.

Obviously the material costs of providing a product or service that requires material components must be met within the price; but material cost-of-production is not a price-determining factor in the case of most of these 'goods and services' that the book classifies as quons. Any such product or service, in a sophisticated marketplace, incorporates many patents in the product itself and in the process by which it is produced and the marketors promoting the product will use a variety of copyrighted slogans, texts and images. In addition, even more important than the items of intellectual property mentioned in the previous sentence, is the brand under which the product is sold. Brands are permanent intellectual property: they do not 'run out of time' as patents and copyrights do. Thus the maintenance of a brand, by constantly updating the product and the intellectual property that it brought to bear in and around it becomes the crucial factor in the continuing success of the organisation that manages the whole process by which it comes to market.

Thus it is that the few individuals who are given charge of any brand-owning organisation can be massively remunerated, because billions of dollars-worth of investment in plant, materials and intellectual property needs to be given constant inputs of new momentum while it maintains all the assets that continue to be income-generative. A firm can fail if an overweening and domineering chief executive is able to bring it down, as was done just a decade ago with the world's biggest banking group. The selection and retention of the right people - plural - who can provide the necessary checks and balances between chief executive, chairman, finance director and company secretary [and equivalents] is the most important task in any company: hence the individuals must be most carefully selected, sufficiently motivated and rewarded, and constantly monitored. A successful company does this over several human generations.

Commentators and politicians may wax verbose on the evil of 'excessive' pay; and often executive pay does seem out-of-line with a company's performance; but the pay must be sufficient, and few chairmen and willing to aim for the lower quartile in remuneration in case they also get inferior performance.

While it may take several years for a corporate executive's performance to be found inadequate, if the firm has been surviving on the momentum generated by a previous management, it takes only a few eeks for a football team's performance to be found wanting. In order to be sure of appearing in the English Premier League and the Championship of the Continent in the next season, a team must be at top form all the time. The reason for being in the big league is to get maximum earnings from television, merchandise etc: to pay to the brightest and best footballers so that they will come to and play with that team. Thus football has become the classic example of the firm trying to maximise its earnings, by constantly coaching players to deliver exceptional performance: for which it has to pay the world's top prices to the few truly star players. Apart from the timescale to which the two sorts of organisation work, and the fact that a corporate executive team is rarely as many as eight top directors, while a football squad needs at least thirty players plus a management team at least as big as a global company, the same rules apply as to how high the remuneration for 'exceptional talent' must be. There is no mystery about this, and little room for corruption.

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