This paper evaluates some of the legal responses to the concerns about income inequality in the context of regulating executive pay. The paper argues that more careful attention should be paid to the impact of wage regulation on corporate productivity. The paper begins by introducing the contractual framework of wage regulation in liberal market economies and identifying the regulatory challenges that arise in relation to wage-setting. It then turns the spotlight onto the importance of productivity and economic growth, arguing that a strategy of increasing productivity would yield better outcomes than redistributive policies. After acknowledging some of the concerns of economists who would prefer to prioritize redistribution, the paper considers how the productivity-redistribution debate has influenced the approach taken by corporate law in regulating executive pay.
The discussion addresses rules regulating shareholder monitoring and the board of directors, aiming to examine the role played by principles of shareholder democracy in common law jurisdictions where ‘say on pay’ legislative reforms rely on shareholders to monitor executive pay. The law establishes a framework of disclosure rules designed to give shareholders full information about the directors’ remuneration policy, and a system of mandatory or indicative votes allowing shareholders to signal their disapproval of excessive pay policies. The discussion identifies some of the reasons why this approach has proved to be ineffective in constraining executive compensation and considers whether restructuring the board of directors, for instance by including workers on the board, may address some of these concerns. The conclusion is that the legal framework, which entails inherent regulatory costs, has proved to be at best highly controversial and at worst entirely ineffective.
This chapter examines the role played by the contract of employment in wage distribution and income inequality, distinguishing between the ordinary entitlement to ‘labour income’ and the finance-derived entitlement to ‘capital income’ linked to share value. The chapter aims to expose the interplay between contract and status in the quantification of income, a differentiation that may be seen as a reinvention of the old divides associated with the master-servant regime. Senior corporate managers, as quasi-partners in the firm, are able to access the residual profit of the firm through bonuses and stock options while most employees are entitled only to a fixed-rate wage. The chapter draws upon insights from corporate law to theorize not only the inequalities between different kinds of employment status but also the way in which those inequalities have been masked by a habit of regarding the contract of employment as a basically homogenous contract-type.