Do top management deserve their high salaries?
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?
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