It is a principle I examined at some length in my Inquiry into the Nature and Causes of the Wealth of Nations that the wages of labour, and still more the emoluments of those who superintend it, are governed not merely by the supply of persons fit for such employment, but by the conventions, expectations, and comparative bargains that accumulate within a trade over time. Severn Trent Water has lately furnished a most instructive example of this tendency, having resolved to double the long-term incentive available to its new chief executive, Mr James Jesic, to a figure of as much as £3.1 million.
Mr Jesic succeeds in this station one Liv Garfield, who held the office for a considerable period and whose own compensation, by the measure of the arrangement now superseded, will in all likelihood be outstripped by that which the board has seen fit to offer her successor. The directors, one must suppose, have weighed the matter with care, having concluded that the attractions of the post required sweetening beyond what was previously thought sufficient to secure a person of adequate capacity.
The occasion of this resolution is not without a certain interest to the student of political economy. The water companies of this kingdom hold, by the nature of their business, something approaching what I have elsewhere described as an exclusive privilege: the householder who wants water cannot readily seek it from a competitor, as the buyer of woollen cloth may pass from one mercer to another. The revenues of such an undertaking do not, therefore, arise from the discipline of open competition, but from a regulated monopoly — a circumstance which one might have expected to weigh upon the deliberations of a board setting the terms of its chief officer's reward.
Yet the board has proceeded. The public, for its part, has expressed what the newspapers report to be widespread anger. This sentiment, however earnestly felt, does not appear to have entered materially into the calculus of the remuneration committee. In my Theory of Moral Sentiments I observed that the disposition to admire the rich and the great, and to neglect persons of poor and mean condition, is the greatest and most universal cause of the corruption of our moral sentiments. A board that sets the emolument of one officer at £3.1 million while its ratepayers voice displeasure is not, perhaps, acting from corruption; it may simply be acting from convention. The two are not always easy to distinguish at a distance of several balance sheets.
What is certain is that the sum has been fixed, the plan has been announced, and Mr Jesic will now have occasion to demonstrate whether the incentive produces, in measurable proportion, the improvement in the undertaking's conduct that must, by the logic of the arrangement, have been its justification.