Fat Cat Pay - 4 December 2006

A Problem Based Learning approach to executive pay levels.

Problem Based Learning - 4 December 2006

Fat Cat Pay - worth every million?

This Problem Based Learning (PBL) activity looks at the issue of pay and rewards for labour. The end of the year is referred to as the bonus season in many major financial districts in the world. It is a time where some workers will get bonuses that are worth more than most people earn in ten years. Does the work they do justify these large sums of money that are paid? What about top executives in business? They get very large sums in bonuses but in some cases, their salary is not that big (relatively speaking). This is a chance to explore your understanding of the labour market and some of these issues surrounding pay.

Learning Objectives

At the end of this PBL activity, students might have covered some of the following areas:

  • Factors influencing the demand and supply of labour
  • The determination of wages
  • Different remuneration methods
  • Theories of motivation at work
  • The role and importance of pay in incentivising workers
  • Ethical considerations in setting pay levels for top executives
  • How do we place a value on the work done by an individual?
  • Labour and value added - marginal revenue product
  • Who pays for bonuses?
  • The effects of high bonus payments on the local and national economy

Resources:

Problem Based Learning

Fat Cat Pay - worth every million?

There will be plenty of people rubbing their hands together in anticipation as the end of the year approaches. This is because the period from December to April is the time when major financial institutions count their earnings and dish out bonuses to the staff that helped generate those earnings. With stock markets on both sides of the Atlantic picking up in recent years, there is an expectation that the bonus payments being received will reach record levels. Bonuses of anything from half a million to several million could be possible for the highest achieving employees of major financial institutions.

A man in a white jersey pouring a glass of champagne

It might be time to break out the champagne for the high earning executives in financial institutions. The effect of these pay rises and the issues surrounding them is considerable. Copyright: Michiel Pruijssers, from stock.xchng.

Governments have to factor in the effect of these bonuses on average pay figures when looking at future economic activity. Young executives flush with large sums of money represent potential consumption and the effects of their spending are not to be trivialised.

There has been concern for a number of years at the rate at which the pay of top executives is changing in comparison to ordinary workers. A recent report by consultants, Watson Wyatt, suggests that pay for executives in the top 100 FTSE companies rose by 7.1% over the last year. Inflation in the UK stands at 2.4% at the time of writing and the average pay rise for workers is around 3.5%.

The 7.1% figure does not include bonus and other remuneration payments. Salaries might only account for around 40% of the total package for such executives. The idea being 'small' salary base but lots of incentives for performance to help boost the total. Are such bonus payments justified? According to some, the answer is clearly 'yes'. These are people who are generating huge growth in businesses and their skills and expertise are at a premium they argue. Is it really one person that is responsible for the growth of a business, however? What would Karl Marx be thinking about this issue?

Biz/ed has provided a number of references for investigation to help you research this problem.

Problem Based Learning

References for Investigation

Biz/ed has provided the following references for investigation to help you research the problem. These are suggestions only and are not the only sources you may wish to use; indeed, you are not obliged to use any of them!

Web sites

Books

  • Marcouse, I. et al. (2003) Business Studies (2nd Edition). Oxford, Hodder & Stoughton
  • Mankiw, N.G. and Taylor, M.P. (2006) Economics. London, Thomson. (See Part 6)
  • Sloman, J. (2006) Economics. Harlow, Essex, Longman
  • Cramp, P. (2004) Labour Markets. Northumberland, Anforme
  • Hale, G. (2001) Studies in economics and business: Labour Markets. Oxford, Heinemann