The news that Jeff Fairburn has been asked to leave Persimmon in the wake of the furore over his £75m bonus should not come as a surprise.
There is a febrile atmosphere of media scrutiny when it comes to such matters, and shareholders had already branded the long-term incentive scheme pay-out as “grossly excessive”.
Unfortunately, there is a real danger with this story that we focus on the number instead of the principles which should underpin that number.
To understand why Fairburn was paid that much in the first place, we need to start with the people who made the decision: the shareholders.
This is entirely their doing. They may not have been happy with the pay-out, but if so, they should surely have made more noise when the incentive scheme was initially agreed.
Put bluntly, if shareholders are stupid enough to allow such schemes in the first place, on their heads be it – it’s their money.
Clearly, in large companies, the chief executive’s remuneration package is a small proportion of the overall value of the business, and so the motivation for shareholder activity in this area will be limited.
But that doesn’t remove the fundamental principle that the shareholders own the company and are free to do with it what they wish.
The reputation and value of Persimmon may have been damaged as a result of the pay-out and the media storm surrounding it. If so, that provides a very strong market-led incentive not to make the same mistake again.
That should be where the conversation ends. Sadly, it isn’t.
Last week, I spoke at an event held by the Centre for Enterprise, Markets & Ethics alongside Matthew Taylor, head of the Royal Society of Arts and former head of policy for Tony Blair. Taylor argued that shareholders don’t give a fig about chief executive pay, and, by implication, somebody else should.
That somebody, according to him, should be the government, which should intervene.
This all sounds so fair and reasonable, but it is a bag of vipers.
State intervention over chief executive pay is a fundamental breach of property rights. The state has no right whatsoever to interfere with the voluntary market process which arrives at a figure for chief executive pay.
Over the past century, the growth and extension of government has become so pervasive that we have lost sight of the fact that coercive intervention by the state is wrong. It has no right to meddle with private companies, period.
The American libertarian philosopher John Tomasi, in his superb book Free Market Fairness, argues that we need a much stronger view of property rights, on a par with natural rights. I agree, but we have no hope of getting there when we think it is perfectly reasonable to tell a company what it should or shouldn’t pay its boss.
The key question is where does it all end? Media scrutiny has forced out a chief executive, but should it force out Ronaldo or Messi for the money they earn at their football clubs? And if people conclude that there should be a maximum weekly wage in football, we really are at risk of going back to the age of the dinosaurs – and ruining the beautiful game in the process.
Of course, this doesn’t stop with footballers. Somebody in a very poor country could look at a person on average income in a rich country and make the same argument about intervening with rules to limit pay. How would you or I feel about that?
Fairbairn’s bonus may well be grossly excessive, but for the sake of freedom and ownership, we should defend his right to receive it, and his company’s right to give it.