Another day, another heap of manure piled on the head of Sir Fred Goodwin, the former boss of the Royal Bank of Scotland. He's getting a huge pension, we were told last week – £650,000 a year. Then we heard: why should Sir Fred get all this money when his bank screwed up so royally? At some point during the weekend, the debate darkened: I heard Harriet Harman's stern words: she will try to make sure that Sir Fred doesn't get the money. Harman, as we know, is not big on judgment, and she may well have overstated the case. But still – the mood is grim.
So we must ask ourselves the question: why do the shareholders of companies pay chief executives so much money? Well, the answer is that good chief executives, like good Premiership strikers, are hard to find. When they do their jobs well, they can make a huge difference to the performance of a company's shares. And if you can find a chief executive who looks like he or she might do well – the business equivalent of Liverpool buying Robbie Keane – it's still worth shelling out a lot of money. Even if, as with Robbie and Sir Fred, the results don't go your way.
In the case of Sir Fred, though, there's a more vexing question: why do chief executives who have failed walk away with such huge pensions? The American economist Steven E Landsburg has an answer to that one. He says that shareholders, who tend to be well diversified, want CEOs to take risks. That's because, if the risk works out, the shareholder might get rich; if it doesn't, it's not much to worry about, because you have lots of other investments.
CEOs, on the other hand, tend to be more risk-averse than their shareholders want them to be – they, after all, only have one career, and failure will put a big dent in it. So when they do take risks, the shareholders cheer. And if they fail, they still want to pay them handsomely for trying – to send a message to the next CEO. Come on, the shareholders are saying – don't be afraid to give it a punt!
At least, that's what they were saying. The times we are living through now are unprecedented; executive behaviour that looked staid in, say, the Indian summer of 2007 looks incredibly risky now. Boring, as people are saying, is the new black.
But the Fred Goodwin affair tells us something very scary, as far as the government are concerned. When they effectively nationalised Fred's bank a few months ago, they agreed to his pension, didn't they? In other words, even as they were fighting the raging fires of this financial crisis, they were still speaking the language of the boom. Pay him handsomely – that was the message. At least he had a punt.