It’s spring, and a chief executive’s fancy lightly turns to thoughts of – his (usually his) pay package. Here’s Elon Musk throwing a tantrum because a Delaware court declared his $55bn (yes, really) Tesla deal unfair to investors and blocked it. Here’s Nick Read, boss of the Post Office, threatening to resign in a huff if his pay isn’t doubled. And here’s Julia Hoggett, CEO of the London Stock Exchange, wringing her hands at the prospect of businesses and bosses currently paid ‘significantly below global benchmarks’ deserting London for the US, where in 2022 top CEOs trousered $16.7m (£13.1m), three times their paltry £4.4m, according to the High Pay Centre.

‘Everyone is doing it’ is the limpest of justifications, more disheartening even, says Margaret Heffernen, than naked greed. The only argument that really carries weight would be the one that’s never used: that they’re worth it. It’s never used because there is no evidence that it is the case. Not for want of trying, researchers have found  only the weakest correlation between CEO pay and corporate performance – indeed, as Gary Hamel noted at the last Drucker Forum, in one recent study the correlation is negative. 

That shouldn’t come as a surprise. Despite its ubiquity, incentive pay only works as intended in the simplest situations, such as individual piecework. In the words of economist John Kay: ‘There is a role for carrots and sticks, but to rely on carrots and sticks alone is effective only when we employ donkeys and when goals are simple’. Repeated studies show that when collaboration and interdependence are involved, incentives have no effect on organisational performance. On a second’s thought, this too is unsurprising. Tracing cause, effect and outcome through any complex process is notoriously difficult, and in large organisations over time, effectively impossible. So where does responsibility stop and start? While GE CEO Jack Welch lapped up plaudits as the ‘manager of the 20th century’, plenty of others contributed: ‘Jack did a good job,’ noted another GE executive, ‘but everyone seems to forget that the company had been around for 100 years before he ever took the job, and he had 70,000 other people to help him’.

Welch and GE illustrate an equally troublesome point. In hindsight, GE’s, and Welch’s, success was a house of cards, built on financialisation. Divested of that prop after 2008, GE faded into a shadow of its former imperial self. Even more humiliating: it has effectively repudiated its past by recruiting today’s boss from outside the company, while its then dullest division, white goods maker GE Appliances, has morphed into a poster-boy for for management innovation, as well as the fastest-growing US appliance manufacturer, under the entrepreneurial ownership of … Chinese enterprise Haier.

‘It is difficult to overstate the extent to which most managers and the people who advise them believe in the redemptive power of rewards’, wrote Alfie Kohn in HBR in 1993. Yet that belief is undercut by every social science finding, for reasons that a child would understand. Individual performance incentives play havoc with teamwork. They crowd out intrinsic motivation and focus attention on the reward rather than the job in hand. How else to explain Read’s demand for double pay at a time when the Post Office is on trial for one of the most damaging scandals in UK business history? Or just as blatant, Musk’s petulant move to swap Tesla’s state of incorporation to a jurisdiction more likely to nod through his reward, when he should be concentrating on the firm’s sales and manufacturing issues, not to mention the existential travails of X? 

Widely dispersed pay levels undermines cohesion and joint purpose. They make clear that behind the fine words we’re not all in it together. By definition, incentives can’t make anyone cleverer or more creative. As for effort, remember the words of then Shell CEO Jeroen Van der Veer in 2009. ‘You have to realise,’ he said, ‘if I had been paid 50 per cent more, I wouldn’t have done the job better. If I had been paid 50 per cent less, I wouldn’t have done it worse.’ In January this year, Centrica chief executive Chris O’Shea admitted that his £4.5m pay packet was ‘impossible to justify’ in today’s conditions.

The truth is that to become CEO today is to step on to a magic pay escalator that transports the occupant upward, come rain or come shine. At most large companies on both sides of the Atlantic, sales, profits and average worker pay most of the time go up roughly in line with GDP, or a bit faster: 3 per cent, say. CEO pay though rises much faster – 25 per cent a year from 1980 to 2000, 16 and 17 per cent in 2022 and 2023, for example. Simple arithmetic dictates that under this regime the cats get steadily relatively as well as absolutely fatter: the 20 times differential with the average employee in 1983 widened to 50 by 2000, and the process has continued inexorably ever since. US top CEOs are now paid 400 or 500 times as much as an ordinary worker, let alone Andy Jassy’s 6,500 times at Amazon. Musk’s interplanetary multiple is hard even to guess at.

The fuel that propels the pay escalator skywards? Simple. The stock awards that supposedly align the interests of CEOs with those of shareholders – and incidentally incentivise CEOs to inflate the share price. The easiest ways to do that are to buy back shares ($3tr worth in the US over the last four years); gear up by adding debt (growing at 9 per cent a year for the last decade, much faster than GDP and firms’ own capital spending; half of it has gone into those share buybacks); and acquire rivals, which provides a temporary hit even as it destroys value in the long term. Together these have fed the great supermanagerial heist that has contributed so much to the upward redistribution, aka growing inequality, behind the rising populism that now threatens to unravel the capitalist democracies.

Urging CEOs and boards to exercise forbearance on pay is a waste of breath. CEO compensation isn’t out of control. It goes up because that is what it is designed to do. Unless we consciously decide to change the model that drives it, it will continue to soar until – until what? I don’t think anyone would seriously want to pursue that experiment to the end.