Michael Jensen

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Activists dressed as eagles protest against Barclays pay-regulations on The Company 's 2012 AGM

the head of The privately-owned online gambling company Bet365, has confirmed its position as one of Britain's best-paid Executive. It was £paid 277 salary, plus dividends, again auflodernde debate about how much should earn the chef.

"The average chief executive of a large American company - according to a recent Senate-Hearing - will be paid about 100 times as much as the average worker. And our government today rewards That excess with a tax break for executive pay, no matter How High it is. This is wrong. "

it was Bill Clinton , He won. And he was prompt on his promise to tackle the excessive pay.

in General, deals with the salaries, as the cost, the reduction of the gain on the taxes paid by a company. President Clinton changed The Law . Companies could pay as much as you wanted to - But salaries over $1m (£770,000) would not be tax deductible.

It had a big impact. By the time Clinton office is no longer left to pay, in the year 2000, the ratio of the chief executive, to workers was to pay 100-to-one. It was well over 300-to-one.

What was wrong? We can approach the question from the olive groves of Ancient Greece .

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The Philosopher Thales of Miletus, so the story goes, was challenged to prove the value of philosophy. If it is so useful, why was Thales so bad?

Aristotle, says this history makes it clear That the question is gauche.

of course, philosophers who are smart enough to be rich, But they are also not smart enough to bother. We can imagine Thales contented himself with a sigh: "Okay, I'm going to make a Fortune - if I need to. "

at That time, philosophy included, read The Future in The Stars .

Thales saw a record harvest of olives, which would mean That high demand time to hire in the city of mills. Thales visited each press of the button the owner with an offer. Aristotle is hazy on The Details , But mention the word "Deposit".

Maybe Thales has negotiated The Right to use The Press at Harvest Time , But if he'd decided to Deposit against the use of it, to keep the owner simply.

If Yes , it is The First recorded example of what we now call the option. A bad olive harvest, and Thales' option would be worthless.

But , whether by luck or astronomical judgment, he was right. Aristotle tells us That Thales, the machines rented "under what conditions he pleased, and collected save a lot of money".

Today, many options, bought and sold on the financial markets.

If I believe That the Apple stock will go up, I could just as Apple shares to buy or I could buy an option to purchase of Apple stock at a fixed price at a date in The Future

The option with higher risk and higher reward. If the share price is lower than buying in my option, I have Lost Everything . If it is higher, I can exercise the option, resell the shares, and make a larger profit.

to solve But there is another use for stock options - an attempt to, what economists call the principal-agent problem. A "principal" owns something; they employ to manage an "agent" For You .

Imagine That I'm The Boss of Apple, and you own Apple shares. You, the client, or one of them. I am The Agent , the management of The Company and The Other shareholders.

More things you want to the modern economy:

you to Trust Me , to work hard, your interests, But you can't see what I'm doing throughout the day. Maybe I'm questioning every decision by an astrologer - not a smart as Thales, either - But I always spin some plausible excuse for why the profits are stagnating.

But what if I was given the options to buy new shares of Apple in a few years? Now I'm on profit to make the share price rise. Sure, if I exercise my choice, which slightly diluted the value of their shares - But if the price is rising, you should not mind.

It all sounds quite reasonable, and in the year 1990, the economists Kevin J. Murphy and Michael Jensen published.

"In Most of the listed companies," she wrote, "the compensation of top executives is virtually independent of Performance . "

Bill Clinton 's attempt to curtail the Board of management's remuneration from stock options a more attractive option,

So, when President Clinton cut the tax relief for the remuneration of the Board, he freed Performance -related bonuses. Clinton adviser Robert Reich , the contrast of the liberation, "It is only managers salaries salaries of shares options moved".

A rising stock market also meant a horoscope, consulting the chief executive would have been pounds in. The Gap between bosses and workers pay bloated. A Clinton-era Congressman says The Law "deserves a place of honor in The Museum of Unintended consequences".

But hold - if the options create incentives for executives to do a better job, this is certainly not a bad thing? Unfortunately, it turned out That a big "if".

the incentives of What options really is the maximization of a company's stock price on a specific date. If you think That the same is exactly how a company runs well, I have to sell some stock in Enron too.

If the shares are not options, The Best way to reward Performance , should not seek firm to the Board of Directors to find alternatives?

In theory, Yes - it is the Board's job to negotiate with the group leaders on behalf of the shareholders. In practice, this is another of the principal-agent problem, because the bosses, the Directors are often influence, and how much they are paid. Since there seems to be potential for mutual back-scratching.

Most of Tesla chief Elon Musk is to pay comes from stock options to Performance goals

paired to Pay In your book, Without Performance , Lucian Bebchuk and Jesse Fried argue That the Directors pay actually care about the links to the Performance But need to camouflage "" this indifference of the shareholders. The Best form of compensation for the fat cats "stealth compensation" and stock options seem to be a way to achieve this.

Perhaps the shareholders are yet another means to bosses, to monitor how the Directors reward.

There is a candidate That many people hold the shares directly, But through pension funds, and there is some evidence That these so-called "institutional" investors can persuade boards more difficult negotiating partner.

If a large shareholder is able to claim a certain amount of control, But this link seems.

the Executive Board's remuneration is often in the headlines, even in countries where The Gap in workers ' pay less than In America . In view of this, based on what makes sense.

How well you can set The Job rate to do a boss?

Almost half of Ryanair's shareholders voted against chief executive Michael O'leary 's pay offer in September

motivated the bosses in the 1960s, and really less, because you deserve only pay 20 times workers? It seems highly unlikely.

On The Other hand, good decisions at the top of a large company are much more valuable than the poor. So, maybe these executives are really worth eight compensation. Maybe.

But if it is, That it is not clear to the voters or workers, Perhaps Chefs should learn from Thales was clever enough to earn more money, But smart enough, whether he is allowed to.

The author writes the Financial Times Undercover Economist column. the show is on the BBC World Service. You can find and or

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Source of news: bbc.com