I was recently reading a comparison about the biggest pay gaps between the CEO and the lowest paid employee in some American companies. The ranking was headed by Discovery Communications , with a difference of 1,951 times to 1. That is, if the lowest paid employee earns, say, $30,000 a year, his top boss would be pocketing around $ 60 million over the same period.
There is a part of society that is uncomfortable and even outraged by this. Employees are also part of society. This explains why a good number of studies conclude that excessive wage inequality damages relations between employees and management . Perhaps that is why in 2015 the founder of Linkedin shared his annual bonus of 14 million dollars among his employees .
The key is in the word “excessive .” Income inequality, aside from being inevitable, is not bad. It is fair, because skills and talent must be paid for. It is also convenient. As critics of executive pay caps viber data argue, inequality fosters competitiveness and the desire to improve. I think few people would argue against this. The problem is excessive inequality . While the line between excessive and reasonable can be blurry, as we move away from it, things become clear enough. Earning four times as much, as the sustainable economy proposes, may seem less than even reasonable; 1,951 times is too much.
Obviously, the founder of a company is not the same as a professional executive, or a family business is not the same as an “outside” manager. It seems that the former have more right to earn more, because they have invested more: not only money, but also their physical, emotional, family well-being… their life, in a word. So, here we are going to consider only the “salaried manager” and members of Boards of Directors .
There are people who think that this debate is exclusively ideological. It is typical of envious leftists and, what is worse, ignorant in economic matters. It is argued that salaries are set by the market; if this can sometimes cause results that seem unfair, it is the best option because state interventionism will always be worse . The market rewards performance and encourages efficiency. If it gives large rewards to some executives, it is because:
They make very risky decisions , and the risk must be rewarded.
Compensation is tied to performance , and they create enormous value for their companies and customers.
These salaries are necessary to attract and retain talent .
In relative terms, they enjoy less protection than a normal worker , for example with regard to unemployment benefits . If they are made redundant, they have often signed competition clauses and may need more time to find a new job.
They are there by the will of the owners of the company, the shareholders .
Furthermore, if we consider the impact on social welfare, it is good that there are rich people; the richer the better, because they will invest, create jobs and we will all be better off . This is the trickle-down economics that Reagan and Thatcher made fashionable . As the latter argued: what is better, everyone equal but poor, or unequal but rich?
However, this set of arguments is increasingly discredited by experience, as well as by rigorous research. The “mystique” of the super-manager contrasts with the half-joking saying, “In the company, people promote themselves to their own level of incompetence .” Jokes aside, is someone really three hundred, one thousand, two thousand times better than another? I understand that Ronaldo or Messi are difficult to replace, but what about the CEO of Coca-Cola?
Moreover, until very recently in Spain shareholders had a vote, but not a veto, against remuneration policy. Although this has changed, this past lack of control points to a failure in one of the theoretical and practical pillars of the current idea of the company: the assumption of remuneration for performance . If shareholders cannot modify economic compensation, then it is very likely that the salary level is not due to the laws of the market . It seems to indicate that the market for senior managers and directors is distorted by other forces. Therefore, it is not necessary to resort to an alleged grievance of the rich towards the poor to consider emoluments excessive. It is enough to refer to the imperfection of the market for high salaries.
Another proof of this, without going any further, is that successive laws and codes of Good Governance around the world have been trying for years to devise mechanisms to better adjust remuneration to performance : indexing shares to the stock market average; ending the re-evaluation of stock options; putting a limit on the proportion of the variable part to the fixed part, etc. These changes are a reflection of the dissatisfaction of investors and their pressure on governments and companies . Richard Leblanc , a Canadian expert in Corporate Governance whom I follow here, highlights the absence of comprehensive indicators to measure management performance . We have many quantitative measures (ROE, employee turnover) but few qualitative ones, since by nature they are more difficult to quantify. And yet, it is these questions (innovation, culture, ethics, well-being, etc.) that reveal the health and sustainability of the company to a greater extent.
There is also the practice of “revolving doors . ” This implies that it is not always the best who reach the top. But it is not necessary to limit ourselves to questionable practices to affirm that the world of Senior Management is very much like an exclusive club : opaque, small and with high barriers to entry, which are not necessarily open to managerial talent or merit. A study from a few years ago on the largest companies in the United States concluded that the game of the Boards of Directors is always played by the same people . For example, the former financial director of Motorola is now the general director of Kodak. A related issue, which we cannot go into now, is the impact that this has on the “glass ceiling” of many women.