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Do top management deserve their high salaries?

October 21, 2008

There was high drama a few days ago when 1900 employees of Jet Airways (said to be on contract or probation) were sacked and then later reinstated due to political pressure. The airline industry in India is in trouble, like it is the world over, but the Jet staff have been assured (again political pressure) that there will be no salary cuts. However, the top management at Jet might take the cuts. But it is doubtful whether salaries will remain stable for other employees in the future. For example, the new batch of trainee co-pilots of Kingfisher Airlines will have to go back to their stipend pay levels (which amounts to almost 90 percent cut in salary).

Whether it is fair to sack employees or not is not the subject of this post, although I have addressed it indirectly. What I want to write about is whether top management, and at times executives as well, are being overpaid, whether their high compensation levels act as an incentive for better performance, and whether they should be the first ones to take salary cuts.

Let us start with labour’s (worker’s) share of the company income, which has been falling over the past decade or so. The following information is from the recent ILO report (click on it for a bigger picture).

What these graphs show is that when it comes to the share of labour in the total income of corporations, it has declined in most countries (in other words, productivity growth exceeded wage growth). Labourers are getting smaller and smaller shares of company incomes and the only exceptions are Central and Eastern Europe, the Russian Federation, the Middle East and North Africa. In these regions, although the labour share has fluctuated over the years, overall there hasn’t been a decline. On the other hand, there has been a steady decline in the share of labour’s wages in developed countries and in Asia.

It is important to note that these figures do not reflect the actual disparity, but simply the trends. For example although the Russian Federation shows a decline, it has one of the highest income equalities in the region.

Share of top management has increased
Not surprisingly, the compensation of top management as a percentage of company income has increased over the past decade. Top executive pay in 2007 for the 15 largest companies in six (selected) countries revealed that CEOs get on an average, between 71 and 183 times more than the average worker. And you guessed right…the highest-paid CEOs are in the United States, where pay is about 183 times the wage of the average American worker. CEOs in Hong Kong and South Africa may be getting less than their American US counterparts in actual terms, but their compensation is still between 160 and 104 times the wage of the average worker in their own country.

Average executives get little as compared to the CEOs
The average executive’s salary when compared to top management’s is not much. A CEO gets over 60 per cent more than the average executive  in Germany, the Netherlands and the United States, and double in Australia and Hong Kong.

Just to illustrate the trend: In the United States a CEO’s compensation has been growing at almost 10 per cent annually, but an average executive’s compensation has been growing only at 2.5 per cent and the figure is 0.7 per cent for workers.

Is the high pay for top management justified?
It is said that top jobs have become more complex due to the changing environment, increased competitiveness, high technology and globalisation, and therefore the CEO needs that kind of remuneration. Another reason given for the high compensation for top management is that it acts as a strong incentive for performance.

However, monetary inducements do not work in all countries and even within countries it depends on the type of organisation. For example, studies in Portugal and the Netherlands do not find any connection monetary incentives and performance, while studies in Germany and Australia contradict each other. While a lot of studies in the United States show a positive relationship, these findings are being questioned.

However a positive relationship has been found in Asia – with Japanese, Korean, and Philippine firms. It is important to note that this applies to certain kind of firms only. For example state owned firms in China show no relationship between increase in pay and performance. Even in Japan, when directors are appointed by banks on the boards of companies, there is far less sensitiveness to an increase in remuneration. So, the results are mixed.

In India I am quite sure that pay increases for top management in public sector firms will not have much of an impact on their performance. However, lower down the line it may be different. The recent 9th commission report which increased government salaries across the board should logically decrease
corruption. Government employees are not very well paid, and therefore their low salaries have been touted as a cause of corruption. Only time will tell what effect the increased pay has on their behavior.

Another reason why the salary structure of top management is supposedly skewed is because it is believed that the way firms decide salary structure of management and executives may be flawed. Here are the points mentioned in the ILO report (these are controversial):

  • The larger the board of directors the higher the compensation to the directors (to avoid organized opposition by directors)
  • Executive compensation is higher if the executives’ appointment is influenced by the CEO for social reasons and also because the directors (who decide executive salaries) want no opposition when the time comes for reappointment to the board.
  • It has been found that the higher the number of institutional investors, the lower the compensation of executives but if institutional investors have a business relationship with the firm, then executive compensation increases.
  • HR Consulting firms have a selfish interest in suggesting higher compensation to the executives and CEOs as they want to be re-hired by the company (or hired by other companies). “Inconvenient” advice is avoided.  Interestingly, these consultancy firms may suggest increases in executive compensation even when the company is not doing well. In this case they  they advise “performance-driven” packages.

If a company can afford it, well then it is really none of our business if they over-pay their execs. But I do believe that people at the lowest levels need a living wage. In a metro like Mumbai for example one cannot live a decent life on a wage of Rs 5000/-per month. But this payment is considered a luxury! I did some checking and found this (Mumbai wages):

  • Salaries of security guards at multiplexes (work hours: 12-14 hours a day) range from about Rs 5000/- to Rs 6000/-a month but only if they work Sundays. Otherwise their wages go below Rs 5000/- and these are just the better paid guards. Guards in residential buildings get less, Rs 3000-4000.
  • Airport cargo handlers get around Rs 2000/- as they are contract labor and I think this could be connected to the high number of thefts of cargo at airports.
  • Corporation cleaners and other contract labor get a pathetic Rs 1800-2000 per month.
  • Sales girls at the fancy shops get around Rs 5000/- and they work 8-9 hours a day, with a day off. However, if what a McDonalds employee told me was right, they get Rs 300/- a day for a 6 hour shift. None of these people (alongwith contract labour) get job security and no benefits either.
  • Drivers in private employment get around Rs 4000/- but working hours are long and over-time pay is not guaranteed. Corporate drivers can get good salaries, up to Rs 8000/- a month  if they are permanent employees but usually they aren’t.

When a company is doing badly, it’s always best that salary cuts start at the top and decrease as one goes lower down the structure. After all if a company is doing badly, who is responsible? Who has taken the decisions to expand, buy assets, hire people, fix salaries and so on? The workers or the CEO?

Related Reading: Difference between rich Indians and poor Indians
Let’s make the poor richer instead of making the rich poorer
Richer countries are less corrupt than poorer ones
India will eradicate poverty, although slowly
Increase in income and life expectancy don’t always go hand in hand
Growth needs to go hand in hand with development
The poor in our country simmer with discontent
Corruption in slum development projects

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38 Comments leave one →
  1. Vivek Khadpekar permalink
    October 21, 2008 8:35 am

    @ Nita:

    Do I detect a subtle change in your commitments wrt favoured economic ideology :-) ? When Manmohan Singh pleaded for corporate fat-cats to take lower pay packets, you were quite unambiguous in your stand on that.

    Anyway, a useful post (though I would have liked to see more hard data on India). And there’s always an inherent risk in comparing percentages based on mutually incompatible baselines.

  2. October 21, 2008 8:45 am

    Vivek, Manmohan Singh’s statement was a general one and I don’t agree with what he said about corporate india taking job cuts just so as to please the poor people. I think if a company is making profits, the ceos and whoever should in fact pay themselves whatever they want (I have said so clearly in my post), but also pay the minimum wage (not the govt stipulated minimum wage, which is very low) to those at the bottom rung. For no other reason than fairness and humanity. When a company is making losses the top honches should take salary cuts alongwith middle level execs but you cannot make those at the bottom suffer for two meals a day.
    About the data, yes I too was disappointed that there wasn’t much data available on India. I think if one buys the report one can get it but I just took the part that was for free!

  3. October 21, 2008 9:20 am

    I am surprised when Naresh Goyal took back all the sacked employees…Can politicians force an industrilist, whose comany is in loss, for such an action?

    And it’s not a problem of only Naresh Goyal’s Jet airways , but of entire aviation industry in india

    And on the pay package of top management, it’s absolutely fine to pay it to them, because they have huge responsibilities for the profitable growth of the company, and meeting sales and profit targets…and also responsible for the performance/availability of workers. But at the same time workers too should be paid reasonably…and a profit making company can surely afford it.

    Vivek, I am not surprised because Goyal and the govt have certainly struck a secret deal. It’s just my guess. The govt. is bent on keeping Jet in business, I think its because they fear that the whole air infrastructure will collapse but I have not studied this issue. And ofcourse I agree, it is absolutely fine for a ceo to get the pay he deserves, but the main thing here is the word deserves. If he doesn’t deserve it, he should be sacked. – Nita.

  4. October 21, 2008 9:43 am

    Nice & very useful info. Thanks.. I would recommend this article as “must read” to Top management :)

    I think Naresh Goyal is not doing right business.. he is too emotional not worried about his investors, stakeholders, shareholders & Company’s future business.

    Bharat, thanks. I have a feeling that Goyal has been paid by the govt, a bailout package. In fact I am quite sure of it! You see, our taxes for turbine fuel etc are very high and I have a feeling some deal has been struck, secretly. The govt. is bent on keeping Jet in business, I think its because they fear that the whole air infrastructure will collapse but I have not studied this issue. – Nita.

  5. October 21, 2008 9:51 am

    I think the answer to the question is ‘It Depends’ and there could be multiple reasons behind it. One reason could be the presence or absence of a ‘pay for performance’ indicator. Another reason could be the presence or absence of a strategic plan and a tactical plan.

    Nandu, yes in each case there are different issues. – Nita.

  6. Abhi permalink
    October 21, 2008 9:58 am

    Fine to pay the top men a hefty sum but who decides this? I seriously cannot understand the fact as to on what basis the top managements are given perks/ performance bonus. If you consider the recent Lehman Brothers case where the CEO was awarded a hefty bonus a month before it filed for bankruptcy… And also the case of AIG, where less than a week after the taxpayers rescued AIG, company executives could be found wining and dining at one of the most exclusive resorts where they ran up a bill of $4,40,000. These guys were getting their manicures, pedicures done while American people paid their bills. Also the Former Chief executive Martin J. Sullivan is receiving five million performance bonuses. Not sure for what reason they are paying such a bonus? For bringing AIG down to its knees?

    @ Vivek Mittal
    Fine, I do agree they have a great deal of responsibility & they should be paid hefty salary, however in case of disaster’s like i mentioned above they should also accept & acknowledge mistakes, take a cut in their salary/bonus etc…

    Abhi, quite unfair isn’t it giving those bonuses. It is plain wrong. They should in fact give up some money they already have!! They should be also sacked and blacklisted so that other companies don’t hire them. – Nita.

  7. October 21, 2008 10:25 am

    You must read that chapter on Tim Harford’s latest book “Logic of Life” where he explains why this is so very lucidly. There is much to it but gist is that it is not to incentivize CEOs that they get higher salary, it is to incentivize his/her subordinates.

    This sounds interesting, and I am sure at some level it is true. However this applies to those who have a hope of getting there. Only those. – Nita.

  8. hoku permalink
    October 21, 2008 10:37 am

    A basic tenet of economic science is that productivity growth is the source of growth in real income per capita. But a study by Ian Dew-Becker, Centre for Economic Policy Research (CEPR), London and Robert J. Gordon , Department of Economics, Harvard University in their study titled “Where Did the Productivity Growth Go? Inflation Dynamics and the Distribution of Income” raise doubts by creating a direct link between macro productivity growth and the micro evolution of the income distribution. Their study show that over the entire period 1966-2001, as well as over 1997-2001, only the top 10 percent of the income distribution enjoyed a growth rate of real wage and salary income equal to or above the average rate of economy-wide productivity growth. Growth in median real wage and salary income barely grew at all while average wage and salary income kept pace with productivity growth, because half of the income gains went to the top 10 percent of the income distribution, leaving little left over for the bottom 90 percent. Half of this inequality effect is attributable to gains of the 90th percentile over the 10th percentile; the other half is due to increased skewness within the top 10 percent.
    Productivity increases generally by use of Technology and by skill and training of the labor force. The study clearly shows that the benefit is corner by the top honchos.

    Vivek@ remember there are cycles of ups and downs in capitalist economy. If CEOs skill is responsible for good profit then why do they fail when bad times come? In fact during cycles upward movement every one makes money and most of them fail during down cycle. CEOs salary is no way an indicator of performance. By the way head of SBI the largest bank of India draws much less salary than the even small private sector bank ( both in terms of profit and business). ONGC ( a fortune 500 company ) chief’s salary is no way comparable even with that of Essar Oil. We also need to consider how a CEOs salary is fixed by a handful ( 90 % of them are his cronies and 10% are unaware of the implication) of those present in AGM where they are asked agree or disagree with a predetermined salary.

    I would also copy a news item published by the Guardian “
    Financial workers at Wall Street’s top banks are to receive pay deals worth more than $70bn (£40bn), a substantial proportion of which is expected to be paid in discretionary bonuses, for their work so far this year – despite plunging the global financial system into its worst crisis since the 1929 stock market crash, the Guardian has learned.
    Staff at six banks including Goldman Sachs and Citigroup are in line to pick up the payouts despite being the beneficiaries of a $700bn bail-out from the US government that has already prompted criticism. The government’s cash has been poured in on the condition that excessive executive pay would be curbed.
    Pay plans for bankers have been disclosed in recent corporate statements. Pressure on the US firms to review preparations for annual bonuses increased yesterday when Germany’s Deutsche Bank said many of its leading traders would join Josef Ackermann, its chief executive, in waiving millions of euros in annual payouts.
    The sums that continue to be spent by Wall Street firms on payroll, payoffs and, most controversially, bonuses appear to bear no relation to the losses incurred by investors in the banks. Shares in Citigroup and Goldman Sachs have declined by more than 45% since the start of the year. Merrill Lynch and Morgan Stanley have fallen by more than 60%. JP MorganChase fell 6.4% and Lehman Brothers has collapsed.
    At one point last week the Morgan Stanley $10.7bn pay pot for the year to date was greater than the entire stock market value of the business. In effect, staff, on receiving their remuneration, could club together and buy the bank.
    In the first nine months of the year Citigroup, which employs thousands of staff in the UK, accrued $25.9bn for salaries and bonuses, an increase on the previous year of 4%. Earlier this week the bank accepted a $25bn investment by the US government as part of its bail-out plan.

    At Goldman Sachs the figure was $11.4bn, Morgan Stanley $10.73bn, JP Morgan $6.53bn and Merrill Lynch $11.7bn. At Merrill, which was on the point of going bust last month before being taken over by Bank of America, the total accrued in the last quarter grew 76% to $3.49bn. At Morgan Stanley, the amount put aside for staff compensation also grew in the last quarter to the end of August by 3% to $3.7bn.
    Days before it collapsed into bankruptcy protection a month ago Lehman Brothers revealed $6.12bn of staff pay plans in its corporate filings. These payouts, the bank insisted, were justified despite net revenue collapsing from $14.9bn to a net outgoing of $64m.”
    I think I need not to say anything more about whether CEO’s justifies their salary or not.

    It is just a manifestation of the flaw in the system which encourages unequal distribution of wealth. Otherwise how it is possible that Richest 2% hold half the world’s assets while the poorest half hold only 1 per cent of wealth. BTW, we should also know that world’s wealth is concentrated so much in few hands that if all the world’s wealth was distributed evenly, each person would have $20,500 of assets to use.

    Hoku, I agree with entirely when you say that when companies are in trouble, the CEO’s should be the first to suffer, as they have to be held accountable.
    However when it comes to distribution of wealth, if we actually do so, soon the $20,500 per person will dwindle to almost nothing. People who create the wealth need to be paid more. How much more is for the company they are working for to decide. – Nita

  9. Vivek Khadpekar permalink
    October 21, 2008 10:55 am

    @ Nita:

    “…Manmohan Singh’s statement was a general one and I don’t agree with what he said about corporate india taking job cuts just so as to please the poor people.”

    Unless my memory is playing tricks, I don’t think he was talking about corporate job cuts, only about pay cuts at the highest levels. One thing your present post touches upon without articulating it is the differentials between the highest and lowest remuneration packages within an organisation. I have seen recent figures somewhere, but can’t recall where. Suffice it to say that the disparities are obscene.

    And people in Manmohan Singh’s position, speaking from formal platforms, are not wont to make “general” statements. Anything they say has an important subtext. In countries such as the USA, the media and the scholars put hours and days of effort into analysing and interpreting such seemingly casual comments.

    Well, I am not sure what you mean because whether Singh was talking about the highest pay packets or not, my stand is the same. I am also not aware of the “sub text” of what singh said.
    But if a company can afford it, they should pay, it depends on them. But yes, I believe they should pay well at the bottom rung also (a proper living wage) and no I have nothing against disparity in income because I favour the capitalist ideas. But yes, if a company cannot afford to pay the top people obscene salaries, it shouldn’t but if it can, all power to it! I believe in fair wages to those at the bottom. I am against exploitation of labour, which means long working hours, child labour, lack of benefits etc.- Nita.

  10. Vivek Khadpekar permalink
    October 21, 2008 11:02 am

    @ hoku:

    Excellent comment. You should write it up as an articles with mor statistics to reinforce your points.

  11. October 21, 2008 11:04 am

    @ Abhi

    It’s not that they are to be paid heavily only for they take huge responsibilities…It’s also because of dearth of such people with that kind of experience and expertise. They can very easily negotiate very heavy pay packages…But it’s not the case with the workers or lower level executives, where there is no dearth of people with similar skills. The lowest level works are paid least because there is no dearth of people to do same work in that small payment..

  12. October 21, 2008 11:13 am

    @ Nita:

    I think it is fallacious to compare the entry level workers’ salaries with that of top management and the CEO.

    Unless calamities of the current kind befall, many lower level workers can continue in their jobs (security) while the average CEO’s tenure is 3-5 years (an exception at nearly 10 years has been RBS’s Fred Goodwin who also just resigned). Needless to say the risk is higher in not just the CEO’s job but also all the officers who carry fiduciary responsibility; they can go to jail for minor violations. There is a trade-off between risk and reward in all jobs.

    While management can usually do the job of the lower level workers (who also benefit from unionisation and therefore may have right to work slow or strike work altogether, rights which ‘managers’ don’t have), the other way round is not necessarily true. Which means there is both a skill and a capability gap contributing to the considerable wage gap. BA used to face check-in staff strike nearly every August like clockwork. On the last occasion, everyone from then-CEO Rod Eddington down to all managers manned the check-in desks and baggage check-in and things continued. Travellers also got personal apologies from management which pleased people. Surprise! No strikes have happened after that.

    At work, as in life, people do not get what they think they deserve*, they get what they are capable of and what they negotiate**.

    * Their estimate of ‘deserving’ may itself be inflated since we all see ourselves as being better than we really are – a ‘self esteem’ thing which is only enforced by indulging parents and a rights-conscious society.
    ** What the market will bear. Even two senior execs working at similar level may be getting paid two different pay packets in two different organisations.

    Shefaly, I agree with everything you say. In fact I think “fallacious” is a very mild term! I am all for giving people the pay they deserve. – Nita.

  13. Vivek Khadpekar permalink
    October 21, 2008 11:14 am

    @Nita,

    This is not the article I referred to in my previous comment to you, but it sets out things clearly. (even gives an inline explanation of what Gini Coefficient means). Significantly, it was published in June 2007, when India was still “shining” and the current crisis was nowhere even on the horizon as far as ordinary people were concerned. To read it, go to

    http://www.hinduonnet.com/fline/fl2411/stories/20070615002812000.htm

    I know about the Gini Coefiicient. However my views remain the same. I have nothing against income disparity as such. In fact Shefaly has articulated the argument in a more sophisticated manner. – Nita.

  14. October 21, 2008 11:17 am

    Top Management works on ‘Perform or Perish’ mode and they need to be suitably compensated. In case of security guards, sales persons in shops and others it is time based work. If there is job security, then salary is generally less. Whereas at lower level drawbacks are more like trade unions, strike, indiscipline, less productivity, switching over to other jobs without notice. Also salary is fixed on qualification and experience.
    You call a plumber/electrician/mason/carpenter for a skill based work, he will charge Rs 300 to 400 even for few hours of work.

    Thanks for your response Old Sailor! As you said, pay should be based on the ability of the person. – Nita.

  15. Vivek Khadpekar permalink
    October 21, 2008 11:26 am

    @ Shefaly,

    An incisive exposition, as usual. While I would have liked to see quantitative qualifiers to your arguments, I am in agreement with most of your observations, in principle. The only one I find difficult to take, from an Indian perspective, is…

    “…the risk is higher in not just the CEO’s job but also all the officers who carry fiduciary responsibility; they can go to jail for minor violations.”

    I refuse to believe that anyone in the Indian corporate sector will ever go to jail for rash adventures with money that is not their own. And the recent events in the USA suggest that it is not very different there either.

  16. October 21, 2008 11:32 am

    @ Nita : Top management. It is such a vague term. Anyway people who run companies in to the ground happen to be both the ‘top management’ and the ‘workforce’. Shefaly mentioned BA, let me mention Air India. They have a horrible ground staff. I mean horrible! I have actually seen them abuse passengers right in their faces. So if Air India is in trouble the staff can not escape responsibility. On the other hand their management though ineffective is at least polite! I have dealt with them as well during some trouble.

    Lets just say further a lot of management staff also gets paid in company stock that employees at a lower level might not get. They should indeed take voluntary or enforced salary cuts especially in such bad times. In India minimum wage workers seldom make enough to do anything else except feed their families unlike the west where such staff can afford far more conveniences. The Indian blue collar salary is enough to just basically let you work and do nothing else. Where as I could tell you of star directors at boards who do nothing but sit around and watch multiple companies sink and make an obscene amount of money. Some of these pests even move from country to country like locusts.

    Now some people have mentioned Jet Airways. They botched up their growth forecast. I mean did they not hire these people anticipating ‘growth’. I think they even continued to hire people while their own costs were rising. In any case even if they had to lay off their cabin crew they deserved respect. If I read it right some of them were actually waiting at 3 am to go to work when they were informed! Respect for the people that work for you is the core of the issue here. I have always treated my workers as my equals. Anyone that gives you half their day needs to be thanked and not only in monetary terms. When I worked my first job in an Indian mobile phone company I did not mind the low salary but really always demotivated me was how some of my bosses treated their staff. I must say as with everything else in India this subject also involves creating a new mindset.

    Odzer, talking about ground staff, I have had a bad experience with Jet staff too when they had misplaced our luggage. They are so condescending and rude! Only if you go to higher levels do you get some politeness. And the way they managed the layoffs was shameful. as you say, there is a way of doing these things, if it was necessary.
    I agree with you on the situation in India. I think its criminal not to give people a living wage. Also I think that these people at the top mgt. who are useless should be sacked but unfortunately in India this does not happen as readily as it happens in the US. – Nita

  17. hoku permalink
    October 21, 2008 11:54 am

    Shefaly@ correct me if I am wrong. CEO Rod Eddington of BA manned the check-in desks when their new system of luggage checked in fail not during strikes by the employees. Moreover it could just be symbolic as it is impossible for a few top executives to run the work of the thousands of employees on 24X7 basis. If there is not striker after that, reasons must be different, not that symbolic ‘karsewa’ by the management. If the management could themselves handle the operation, they would not have maintained the workforce in the first place.
    >At work, as in life, people do not get what they think they deserve*, they get what they are capable of and what they negotiate**.
    How exactly you measure capability of an individual into a very complex organization, when the output is a function of number of external variable as well as team efforts. As there is no exact function to measure capability at the highest level (unlike a shop floor worker) it is always something ‘deserving to the post’. Similarly perks also reflect the post held but not capability. Capability component is more reasonably reflected on the bonus and commission figure. BTW how one decide salary of a untested, no experience IIM fresher ? Capability? CEOs salary in some cases has shown that no market bearing as well. CEO salaries and bonus has increased even when companies are not doing well. It is expected that earning of Indian Companies this financial yr is not going to be as good as the previous years, have you heard any pay cut is their salary/perks/commission and bonus?

  18. hoku permalink
    October 21, 2008 12:02 pm

    OldSailor@
    “Whereas at lower level drawbacks are more like trade unions, strike, indiscipline, less productivity, switching over to other jobs without notice.”
    It is not clear.

    “Also salary is fixed on qualification and experience.”
    I can give you thousands of examples where qualification and experience of the workers at the lower level is much much higher than the CEO and others but salary is not. Just pick up annual report of any company and read the qualifications of the CEO and others.

    Nita@ Sorry for hogging so much of space.

  19. October 21, 2008 12:23 pm

    @ Hoku:

    At the time of the T5 move, Willie Walsh, not Rod Eddington, was BA’s CEO. He did however present himself to apologise to people, which did not cool anyone’s tempers then. The problem lay between BA and BAA, the company that runs airports. Customers however see the company they deal with, not the back-end, ergo bad PR for BA.

    Strikes are actually only symbolic and a fairly poor negotiation tool. Even unionised staff cannot afford to go on strike for long periods of time. So a symbolic response, like BA’s, is sometimes the only thing befitting.

    For unionised staff, the pay negotiations are handled by their union leaders. What they take home is what was negotiated by their leaders. May be they need to get new union leaders?

    For the rest of your comment*, the answers are explained by ‘the market’ and ‘negotiation’. They cover valuation of both prior experience and of the potential that the new employer may judge them to possess.

    Even if the output depends on other people and on external factors, a person, who makes it to senior management, has likely experienced many years of working with similar constraints.

    Managing people – as well as anticipating changes in the business environment – is a skill too. There are many ways of and tools for testing those in the course of the evaluation process. Before being appointed, senior managers often have interviews running into weeks and with several people in an organisation. If so many interviewing employees in the organisation make a wrong call, I think the organisation is in deeper excreta than it cares to admit, no?

    You probably know that many senior executives are often given shares or share options as ‘golden handcuffs’. They are on a timetable with SEC/ FSA/ SEBI for selling their shares so that they cannot appropriate profits based on insider information. That is an additional uncertainty in their compensation, not a guarantee to print money.

    Never mind what the successful outcome depends on, you can be sure that rewards are shared, even if variably, across levels; however the responsibility for an unsuccessful outcome always means one or two heads roll and they are rarely at the junior levels. That additional risk is built into their packages.

    For IIM grads, it is the potential and the promise of future success that employers want first dibs on. Unlike when I graduated*, now many graduates have prior and relevant work experience which future employers value as well.

    When I was a child, we used to play a game of drawing a line on paper and asking our friends to make it shorter without using an eraser. The answer was to draw a bigger line next to the first one, which was then ‘shorter’.

    It is similar about fighting for more money. One should aspire – and work – for collective betterment (becoming the longer line) not collective worsening (erasing the first line in part). Collective poverty is not the answer. Sorry if that sounds idealistic to you! But there are plenty of people in India, the UK, Europe and the US, who did not worry about lower wages but focused on self-improvement and got ahead despite difficult conditions.

    * I am an IIMA graduate of yore. From campus, I took a relatively lower paying job in an Indian firm instead of a well-paid MNC job, because of my principles, but then I am silly that way!

  20. October 21, 2008 12:31 pm

    @ Vivek:

    That is a matter of enforcement and not of the principle.

    Besides, what the executives in the US did was perfectly legal. You can argue that impunity and ‘business innovation’ are separated by a thin line; I would argue that the regulator could not keep up with the industry. The whole credit crunch thing is a ‘perfect storm’ and no single party is to blame.

  21. chirax permalink
    October 21, 2008 12:40 pm

    @Nita : How do you define “being overpaid”. I know people who work in X Company draw 15LPY and are senior management 9-10 Year experience and on the other hand I know people who earn 14LPY with 4 years of experience.

    @whether they should be the first ones to take salary cuts

    Most of senior mgmt salary is based on insentive and performance of the company hence they face the blunt anyways. So is it fair to ask to take a salary cut when they too go through the same process.

    @the compensation of top management as a percentage of company income has increased over the past decade
    …So has the Competition, Risk and the instability in the market.

    @Is the high pay for top management justified?

    Now, Nita looking it from a bit different view:

    What is the Purpose of a Business?

    What ever might the heck company say there purpose is to make profits by any and all means possible. This also include keeping a tab on people’s salaries!!!

    Now assume you start a hotel you’ll have to hire a Cook and Waiter. You’ll make a operating profit of 60% in the hotel. Will you share the profit with Cook and waiter or Just pay them enough to get by. Same thing applies to big firms.

    Also we must remember that we have a lot people in India so if a person won’t take up a job some one else who’s in more need.

    In no way I am saying this is right, I am sure most of us face this.

    So No its not justified, however is there any other way, unless we go socialist.

  22. hoku permalink
    October 21, 2008 1:35 pm

    Shefaly@ You are right regarding BA. But I have reservation regarding unionised staff and their leader. We can fight again next time. I agree with you about collective betterment. But again may differ about how to achieve it. Chirax@ fully agree with you on the last point. Nita@ I think we can have another interesting debate on ‘wealth creation’ (for example whether a stock market (secondary) is actually creating wealth or not), what exactly is wealth and who actually creates wealth. Nita@ thanks for the raising the topic. Its really interesting to see people pondering on the issue of inequality.

  23. October 21, 2008 2:09 pm

    @ Hoku

    There is no need to fight. :-) We are entitled to our different views. I have successfully gone from knowingly accepting a low salary for my principles, to being a good earner, who does not depend on a hierarchy or a corporate job. We have to know what we are willing to accept and if we don’t, we need to have the courage to walk away and move on. Applies equally to the rich and the poor.

  24. October 21, 2008 5:11 pm

    Some of the best compensated people in America were and are executives of Wall Street firms. Yet that hasn’t prevented them from getting their firms into trouble. So, I don’t think huge compensation by itself is much of an incentive to act wisely — and it might even provide an incentive to act unwisely.

  25. October 21, 2008 6:22 pm

    I may not be able to tell if a CEO salary is unfairly high, but I can probably say that their salary is not structured and aligned to their’s and company’s goals. Take Steve Jobs and Sergey Brin for example. They draw a yearly salary of $1 just to keep them on the roll. The rest of the compensation is drawn from the performance of the company. If the company doesnt perform well, they get nothing out of it. So they are directly motivated to make the products better, increase sales, innovate new things.

    To me, as a CEO, taking ownership is a very important aspect. If you know you are going to get a comfortable salary no matter what then the CEO is going to be a maverick and not worry about much of the effects of the decisions. In other words he has the room to play it risky.
    Just my 2 cents, I may not be entirely right.

  26. October 21, 2008 7:20 pm

    @ Dinesh Babu

    Not all entrepreneurs can be Sergey but it is common for owner-managers of companies to structure their compensation for a small salary and big dividend/ profit share. The reason is mainly tax avoidance – while looking very benevolent (good PR always good!). Cynical but true.

    On the rest, about risk and creative room, I agree.

  27. chirax permalink
    October 21, 2008 7:24 pm

    Also Nita, on a tangential topic:
    @About the data, yes I too was disappointed that there wasn’t much data available on India. I think if one buys the report one can get it but I just took the part that was for free!

    Never ever buy a report, I am saying this as a person who has many consultant friends, according a recent reports most of the Consultants copy data from us blogger :) also reports are most of the time B%%S@^& . Please use the secondary search ;) we all do, and they too.

  28. October 21, 2008 9:45 pm

    ” When a company is doing badly, it’s always best that salary cuts start at the top and decrease as one goes lower down the structure. ”

    I agree.

  29. October 21, 2008 11:03 pm

    well ,i think salary in india si really varied a lot whihc depends upon company to company ..
    and also from college to college …what i will be getting in a company may be less compared to guy from another college for the same designation …
    sad but true…
    coming to main topic ,i really feel job cuts and salary cut must start from upper managemnt level ..
    imagine when a middle class man is axed from the company he has no other go …while the high paid CEO can afford to lose some percent of the money …

  30. October 21, 2008 11:54 pm

    @hoku,
    Sorry for replying so late. At lower level, when salary is fixed, the drawbacks and the risk involved with them are also considered.
    Also, to avoid frustrations later, overqualified persons should not be employed. Just because a B.E graduate is jobless, you can not appoint him for non technical job. ‘Right man for right job’ has to be followed.

  31. Vivek Khadpekar permalink
    October 22, 2008 6:11 am

    @ Arvind:

    //…what i will be getting in a company may be less compared to guy from another college for the same designation …//

    I have no direct experience of the corporate sector, but my impression is that this holds true mainly for freshers. If the company genuinely values merit, that is what counts in the long run. And of course experience.

  32. October 22, 2008 9:26 am

    Chirax, I guess it is difficult to define overpaid and mostly it is a perception of the employees in that same company. For example if well paid managers are seen to be doing nothing…but I guess an objective assessment is difficult. And about the reports, no I have no intention of buying any report. I get no money from this blog, but instead a lot of my time!

    Paul, I guess there are always some idiots at the top! Just like there are at the bottom, but the ones at the top do great harm.

    Dineshbabu, agreed. If a ceo knows that his salary is going to come regardless of performance then he is likely to be complacent.

    Vishesh, thanks.

    Arvind, like Vivek said it is possible to get ahead on one’s merit in the private sector but I agree that those from premier institutes get a head start and it can be either de-motivating or a challenge. I personally had to be content with starting off as a graduate trainee despite my MBA and people from IIM’s were management trainees. There were some firms who refused to even meet us! :) Finally, I was glad to just have a job because at the time when I was a fresher, there just weren’t enough jobs going around!

  33. October 22, 2008 9:55 pm

    Ahh there are too many salary related woes in our profession too. And we feel salary should be based on work done and that too quality of it. In our field most of the top professors are not good teachers but get paid for their credentials not work. They come late, take less classes than us lecturers, and go home early. In government engineering colleges such old professors don’t take lectures even! But of course not all are like this. Still, because of those who are ; all this causes resentment among the people in lower rung of the ladder.

  34. October 22, 2008 10:02 pm

    @ Reema:

    In your line of ‘business’, the incentive structures are different. The key is not money but ‘tenure’ and the incipient certainty. CEOs and top management have no such certainty; they know that the Damoclean sword hangs over them ready to fall anytime.

  35. October 22, 2008 10:50 pm

    I could never understand how Jet took back all the sacked employees? If there was a monetary crunch, how could the airlines afford all of them?
    Something fishy? I wonder if it was some sort of a political stunt!
    Coming to my company, now a days companies have a new method of cutting salaries. They set certain very high goals(in terms of profits) which are next to impossible to achieve. When the quarterly results come, even though the company has made a huge profit, it is said that the “goals” are not met. Thus, the variable allowance is cut from the employee’s salary. Believe me, it has happened with me and it hurts.
    But, it hurts more to the top level managers because their variable components of the salary is huge which means a huge drop in the salary. Also, many of the top managers have a more insecure job because they are taking all the big decisions and if they go wrong, the company moves towards loss which will eventually lead to their salary cuts too.

  36. October 23, 2008 2:51 am

    CEOs and top management have no such certainty; they know that the Damoclean sword hangs over them ready to fall anytime.

    True, but given the revolving door policy – and ignoring any conflict-of-interest – between businesses and governments/regulatory agencies (at least in the US), the chances of finding a fired/pink-slipped ex-CEO in a homeless shelter or standing in line in a soup kitchen are slim to none. Friends in high places are always ready to scratch each others’ backs when needed. ;)
    Then there are also speaking engagements which pay quite handsomely.

  37. October 23, 2008 10:44 am

    I think that’s the way capitalism works.

  38. October 30, 2008 4:22 am

    Most of what I would have said has been already echoed by boku. The 700 bn $ bailout included a clause here that aimed to limit the golden parachutes that CEOs tend to resort to, once a takeover is completed. Paying millions out of shareholder’s money to one person can never be justified. It’s funny how this continues to happen, because of all the lobbying going around.

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