The market in chief executives is smaller and much less global than is sometimes imagined
Is there a global market for chief executives? Of all the justifications for escalating executive pay, this one has perhaps survived the financial crisis and related rewards-for-failure furore better than most.
Its logic is simple. There is a global talent pool that irrigates the top levels of corporate life. People with rare abilities will gravitate to wherever they will be best rewarded. Therefore, for owners of businesses to undershoot the market rate for a leader would be non-competitive.
It is time this was thought about more carefully. The majority of chief executives do not arrive by way of a “market” at all. They emerge from inside their organisations – they are company men (and sometimes company women) whose abilities are often context-specific. They are not roving guns for hire.
One could confuse matters by calling this an “internal labour market”, but the favoured phrase is another watery metaphor – a talent pipeline. Some 59 per cent of FTSE 100 CEOs are internal appointments who have been with their firms for at least five years. A third have been insiders for over a decade.
That said, there is a trend towards more external hires: currently 41 per cent. That’s a large minority, especially compared with 35 per cent recruited externally in 2002. Although there are big disparities in the habits of different sectors, hiring externally has been linked to the phenomenon of the “superstar” CEO – the perceived need for a big name; and, in turn, this swells a rising tide which lifts the boats of insiders and outsiders alike. No firm wants a reputation as a poor payer of its boss class. In Japan, where leaders are incubated over long periods inside their firms, pay is more restrained.
Blanket statements about the performance of insiders versus outsiders are difficult to make, and much depends on the health of the company at the time of transition. Headhunting firm Spencer Stuart studied chief executive transitions between 2004 and 2008 in FTSE 150 companies and found internal appointments were the more consistent performers. Picking an outsider was a gamble – it could be a prelude to extremely bad or extremely good results.
Authors Jim Collins and Jerry Porras of Built to Last fame, note that the bosses of “visionary firms” – defined as acknowledged leaders in their sector (think Apple) – are almost without exception internals. Academics also suggest that sectors with a high proportion of external recruits are often “paying for luck”.
It is also less disruptive to bring on someone internally. Knowledge stays within the firm, perhaps trust is higher, too. And there is less risk of an executive exodus as fear of the outsider mounts.
So if the notion of a market in chief executive labour needs qualification, what of its putatively global scale?
If the talent pool is global, those fished from it are likely to be diverse. According to a survey compiled for the High Pay Commission, a body set up by the left-leaning pressure group Compass, there were 145 individuals who served as chief executives of FTSE 100 companies between 2005 and 2010. Of these, just over half (85) were UK nationals. The rest were from the US (19), South Africa (eight), the Netherlands and France (five each), Ireland (four) and Australia and Sweden (three each), Canada, Germany and India (two apiece) and one each from Chile, Israel, Italy, Mexico, South Korea, Switzerland and Ukraine. In the FTSE 250, 77 per cent of chief executives were UK nationals.
Does this reflect a truly global talent pool? Language, shared business culture and patterns of trade clearly count. But UK chief executives are still an international bunch and many occupations are following the same pattern: 30 per cent of NHS professionals are non-UK nationals, as are 20 per cent of low-skilled workers and 13 per cent of senior academics.
In most occupations – as in economics more generally – increasing the supply is apt to lower the price. This is part of what makes immigration so politically toxic: internationalising the labour supply is identified with holding back the pay, status and conditions for others in the market.
We are asked to believe the exception must be those at the very top where the opposite rules apply. The same goes for one or two other far-out walks of life like sport and entertainment which occasionally provide a rather strained analogy for business (superstars again). There’s only one Rihanna, only one David Beckham. So there is only one Bob Diamond or Sir Anthony Bamford, too.
In one sense this is quite true: running a large company is not something everyone can do. However, the claim that there is a relationship between globalisation and top pay runs into some prominent counter-examples.
The US may be a country made by immigrants and the spiritual home of neo-liberalism, but it is also a somewhat less open economy than the UK, not least in its hospitality to foreign-born chief executives. A study in 2008 from rating agency Standard and Poors found that only 14 of the top 100 US companies was led by a non-US citizen. This has not affected world-defying, benchmark-setting rewards for its corporate elite. America enriches its leaders largely without the encouragement of a global market.
We ought to be more suspicious when fingers are waved vaguely at global markets as an important factor shaping chief executive pay norms. The market is smaller and less global than is supposed – and it does not operate by orthodox market forces. In fact, the market in top people is unusually susceptible to being manipulated by power, culture and ideology. The talent pool is shaped by the shoreline.