Karl Marx would be spinning in his grave. The media are reporting excitedly about shareholder revolts against the executives.
That means capitalists are revolting against the workers. That is the world turned upside down. Marx’s idea was that the workers would revolt against exploitation by the evil capitalists, not the other way around.
In the bad old days, workers put in all the effort and the capitalists took all the reward. Now shareholders are left with all the risk and the workers take all the rewards: ask any bank shareholder how they feel about such a risk return ratio.
As ever, Marx got it wrong and Adam Smith got it right.
Adam Smith predicted excessive CEO compensation and a devil-may-care attitude to other people’s money. CEOs are not being rewarded for failure, or for success. They are being rewarded for power.
They take excessive compensation because they have the power to do so. Shareholders are highly fragmented; most hold their shareholdings indirectly through large institutions who are either very passive or want to be nice to large firms in the hope of gaining more business for their banking arms. The shareholder is screwed.
Power has gone from the people who own capital (shareholders) to the people who control it (workers). In a knowledge economy, this is not surprising.
The scarce resource is not money, even in the Credit Crunch. The really scarce resource is talent. Most of the great start ups such as Google, Dell and Microsoft started in the proverbial garage. Money follows talent.
As with all revolutions, there are winners and losers. Senior executives are the big winners. Savers, pensioners and investors are the losers. The logical conclusion is that executive compensation and shareholder returns should be much more closely aligned.
Stock based compensation should not be a juicy extra on top of an excessive salary: it should be the only compensation for top executives. This would oblige CEOs practice what they preach about shareholder value. The chances of CEOs practicing what they preach? About as likely as meeting Karl Marx when you next go to Starbucks.
(Pic: Lincolnian (Brian) cc2.0)
