Productivity, Profits and Pay

Tito BoeriTito Boeri

fondazione RODOLFO DEBENEDETTI

Cagliari, May 29th, 2010 

Crucial topic before and after the crisis

• Before: excessive risk taking deemed to beinduced by bankers’ pay. 

• After: exit strategy requires sustainable growth• After: exit strategy requires sustainable growth, hence productivity gains, while capital ratios ofb k b i d b i i fibanks can be increased by reinvesting profits.

• Much uninformed debate on the scope for policy p p yintervention in this domain: from ceilings toCEOs pay to fiscal incentives to productivity‐CEOs pay to fiscal incentives to productivity‐related pay. 

Cagliari, May 29th, 2010 2Tito Boeri

The two reports1. Murphy, Conyon, 

d i2. Lucifora, Bryson, Freeman, 

i lli i

p

Fernandes, Ferreira, Matos:

• CEO pay and firm

Perrotin, Pellizzari:

• Workers pay and firm• CEO pay and firmperformance

Diff b t

• Workers pay and firmperformance

C l li k f t• Differences betweenfinancial and non‐financialind str

• Causal link from pay toproductivity

industry

• Problems in bonus • How do different incentivesschemes affect productivity

schemes:• Asymmetry

• How to increase coverage

• Performance MeasurementCagliari, May 29th, 2010 3Tito Boeri

In between workers and CEOs

• When performance‐related pay is for both CEOse pe o a ce e ated pay s o bot C Osand workers, only for CEOs or only for workers? 

R l ti iti i ti Wh CEO id• Relativities in compensation. Why CEOs are paidso much relative to the other workers?

• Preliminary lessons from Italian policy experiment: are fiscal incentives efficient inexperiment: are fiscal incentives efficient in promoting productivity related pay? 

f d b• Drawing on a survey of managers carried out byManageritalia for fRDB (many thanks!). 

Cagliari, May 29th, 2010 4Tito Boeri

Manageritalia data• Manageritalia is a national association which represents

ddl d l (

g

over 35.000 middle and top managers in Italy (private sector, mainly services)

• Three years ago Manageritalia launched a survey whichprovides data on manager characteristics and behaviour

thevery year (data used also in Xth fRDB Conference)

• The 2010 survey is based on 1200 interviews from allyItalian regions and nine industries

• Additional questions (incentives productivity relatedAdditional questions (incentives, productivity relatedpay, fiscal incentives) introduced just for thisconference Today presented for the first timeconference. Today presented for the first time.

Cagliari, May 29th, 2010 5Tito Boeri

Not many new adoptions ofperformance related pay (PRP)performance‐related pay (PRP)

Managers and performance related pay

50%

60%

40%

20%

30%

10%

20%

0%

No Yes, for less than 1 year Yes, for less 2‐3 years Yes, for less 4‐5 years Yes, for more than 5 years

Source: Osservatorio Manageriale Manageritalia 2010Cagliari, May 29th, 2010 6Tito Boeri

Which type of performance?yp p

Productivity related pay: criteria

40%

45%

50%

25%

30%

35%

10%

15%

20%

0%

5%

10%

Cagliari, May 29th, 2010 7Tito Boeri

Source: Osservatorio Manageriale Manageritalia 2010

How much? Yearly variable payy p y

Managers PRP (mean)

35000

40000

25000

30000

10000

15000

20000

0

5000

10000

0

Cagliari, May 29th, 2010 Tito Boeri 8Source: Osservatorio Manageriale Manageritalia 2010

A few with schemes for all workers

Performance related pay: managers and other employees

40

45

50

30

35

40

20

25

10

15

0

5

Top manager, middle manager and workers

Top manager and middle manager

Top manager only No Incentivesand workers manager

Cagliari, May 29th, 2010 9Tito BoeriSource: Osservatorio Manageriale Manageritalia 2010

Manager vs WorkersgMORE PRP MANAGERS – LESS PRP WORKERS MORE PRP MANAGERS – MORE PRP WORKERS

MORE PRP MANAGERS – LESS PRP WORKERS LESS PRP MANAGERS – MORE PRP WORKERS

Cagliari, 29 Maggio, 2010 Tito Boeri 10Fonte: Osservatorio Manageriale Manageritalia 2010

Managers and other workersgMORE PRP MANAGERS – MORE PRP WORKERSMORE PRP MANAGERS – LESS PRP WORKERS

LESS PRP MANAGERS – MORE PRP WORKERSLESS PRP MANAGERS – LESS PRP WORKERS

Cagliari, May 29th, 2010 Tito Boeri 11Source: Osservatorio Manageriale Manageritalia 2010

Why managers paid so much more?

• Executives can be paid up to 500 times more than average worker. Key factor behind rise in inequality is top 0.05% pay.q y p p y

• Three explanations offered in report # 1 for high and rising pay of CEOsand rising pay of CEOs– Rent extraction: CEOs have the power to influence their own pay. 

– Efficient contracting: Principal‐agent problem. g p g pIncentives to optimize firm’s value.

– Perceived cost of options: (according to accountingPerceived cost of options: (according to accounting rules predating the crisis).

Cagliari,rules May 29th, 2010 12Tito Boeri

It is ultimately a matter of rents

• Power‐rents are crucial in inducing the adoption 

y

of efficient contracts, they know what the company can afford, so they extract thecompany can afford, so they extract the maximum rents for themselves

i d d l i h l h• Low perceived costs do not explain why also the non‐bonus component of pay has not declined together with the rise in bonus schemes. 

• Reducing rents (more competition in product• Reducing rents (more competition in product markets, better regulation in the financial sector, 

t “t bi t f il”) ld de.g., wrt “too big to fail”) would reduce pay gap.Cagliari, May 29th, 2010 13Tito Boeri

Do fiscal incentives (FI) matter?4 MORE FI – LESS PRP MORE FI – MORE PRP

.24

.22

es (%

).2

cal I

ncen

tive

.18Fi

s c.1

6 LESS FI – LESS PRP LESS FI – MORE PRP

Cagliari, May 29th, 2010 Tito Boeri 14

.4 .6 .8 1Decentralized Bargaining (%)

Do fiscal incentives (FI) matter?

.25 MORE FI – LESS PRP MORE FI – MORE PRP

2.

All ItalyAll ItalyAll ItalyAll ItalyAll ItalyAll ItalyAll ItalyAll ItalyAll ItalyAll ItalyAll ItalyAll ItalyAll ItalyAll ItalyAll ItalyAll Italy

5.2

ntiv

es (%

).1

5Fi

scal

Ince

n.1

F.0

5

.2 .4 .6 .8 1Decentralized Bargaining (%)

LESS FI – LESS PRP LESS FI – MORE PRP

Cagliari, May 29th, 2010 Tito Boeri 15

Key questions for the day

• Is PRP efficient from a private standpoint? And 

y q y

from the social standpoint? Does it increaseproductivity, pay and profits?p y, p y p

• If so, why is not so much widespread? Whichpolicies could increase the number of firms andpolicies could increase the number of firms and workers involved?

• Should PRP be regulated? Where? How?

• Rules: one hour report presentation 30 (15+15)• Rules: one hour report presentation, 30 (15+15) minutes discussants, one hour discussion. Final

l A d f ipanel. And for survivors…..  Cagliari, May 29th, 2010 16Tito Boeri

Thank you!y