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Is CEO pay all about greed - or a way of keeping score?

Many people who object strongly to what they see as obscenely high levels of chief executive pay attribute them to "greed." It is an appropriately ugly word which, with a little practice and the addition of some adjectives such as "sheer" or "breathtaking," can be spat out with venom.

There are three implied assumptions in this explanation – greed is bad; greed is unnatural; if others with more natural appetites ran our corporations, they would not demand such huge pay packets, and the social tensions such extravagant rewards cause would ease.

All three assumptions are open to question.

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"Greed, for lack of a better word, is good," the Gordon Gekko character declared in the 1987 movie Wall Street. In the film this was meant to be an apologium for avarice, but it contained truth. Greed, for lack of a better word, is the energy that drives markets to move resources to higher value uses.

Greed, in the sense it is used in the executive pay debate, is not unnatural either. As Max Weber, the social scientist, said: "The impulse to acquisition, pursuit of gain, of money ... has been common to all sorts ... of men, at all times ... wherever the ... possibility of it is or has been given." (From The Protestant Ethic and the Spirit of Capitalism, Allen & Unwin, 1930.)

If greed, in Mr. Weber's sense of "the impulse to acquisition, pursuit of gain, of money..." is natural, we cannot be sure that a change of personnel at the top of our large companies would moderate senior executive pay. Those who rail against the greed of top executives should ask themselves whether they would behave any differently if they found their way into an orchard where money grows on trees.

But once in that orchard, what motivates chief executives to seek more rewards long after their marginal utility of money has diminished to close to zero?

One possibility is that an annual pay package is a measure, not of worth (there is no correlation between the chief executive's pay and how well a company performs), but of how well the recipient has been playing the game.

The CEOs of large companies compete with one another for the status conferred by the size of their pay packets or, like top golfers and tennis players, by their career earnings.

But notwithstanding this impulse to acquisition, everyone wants to be thought well of by others. It cannot be comfortable for chief executives to be pilloried in the press, alongside investment bankers, as greedy fat cats, who rake in wheelbarrow-loads of money at a time of austerity and rising unemployment.

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It is not the wealth of chief executives people object to. Rich and successful entrepreneurs do not attract the same criticisms. The indignation stems from the widespread belief that CEOs are being paid far more than they are worth and taking home money that should be going into the pension funds and savings of ordinary people.

It remains to be seen how chief executives and other very well paid executives and bankers respond to the disapprobation being heaped on them by politicians and the public at large.

They need to do something. If they don't, others will. There are signs that the long and, in view of who they represent, puzzling silence of institutional investors on senior executive pay, is ending.

The chief executive gravy train that has been accelerating strongly since deregulation and the shareholder value revolution in the mid-1980s isn't hitting the buffers yet, but the sound of brakes being applied is unmistakable.

Tom Lloyd is a visiting fellow at Northampton Business School and author of Business at a Crossroads: The Crisis of Corporate Leadership

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