Saturday, 16 April 2011

The morality of pay

The Church of England has taken a line on executive pay. You may ask what has that body got to do with the world of business. Well , there is the small matter that the Church manages a £ 5.3 bn portfolio and is a shareholder in many companies. And, of course, it is a voice of morality, however much you may agree or disagree with it.

The Church of England has said that it will not vote in favour of executive pay proposals that have bonuses more than 4 times the salary. While its influence as a shareholder might be somewhat limited, its voice has the benefit of a moral argument. Just a little while ago shareholders in HSBC voted to limit bonuses to a maximum of 10 times annual pay.
Readers may pause here to consider the obvious question. Who on earth earns bonuses many times his salary ? This blogger has seen a lot in business. Outside of the financial services industry,  there is virtually no place where an employee can earn 10 times his salary as a bonus. So what's so special about the financial services industry ??

What is special, is that the pay structure for bankers has remained rooted in the past. Years ago, most banking businesses, especially investment banks , were partnerships. Salary at the top tended to be very low, and bonuses were really a form of profit sharing amongst the partners, who were the owners. That's why, until not so long ago, being made a partner in Goldman Sachs was such a big thing. Now, most of these entities are corporates. Senior managers are employees, not owners and therefore have no right to profit sharing. But the old pay structure remained and its entirely the fault of the shareholders that they let it continue.

Its a completely specious argument that such stratospheric pay is a reward for talent and performance and if they don't pay such amounts, talent will go elsewhere. The market for top talent is highly imperfect and is not ruled by price alone. And beyond a certain point Maslow's theory kicks in - there isn't that much of a difference between $25m and $ 30m, although mathematically one is 20% higher than the other. And come to think of it, a little less talent going to finance would be a good thing - some plodders would bring sanity into that insane world of risk taking.

This blogger is of the view that the Church of England is absolutely right in taking the stance it has done. And other shareholders would be wise to follow suit.

16 comments:

  1. ungaluku mattum engenthu thala intha newslaam kannula paduthu? :)

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  2. @gils - vera velaye illiye.

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  3. Where do you get such pieces of news from... absolute mind blowing! As you say it is indeed advantageous for business when bonuses are controlled.

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  4. You nailed a big part of one of the flaws in the system that is overlooked. How did the compensation structure evolve into one that is so warped and that encouraged all of the unethical behavior which crushed the economy around the world? The sad part is that over here in America the ones who benefitted from it are the ones in charge of reforming it, and they appear to be doing absolutely nothing to change the way compensation is handled on Wall Street.

    I couldn't help but laugh everytime one of these guys would get on tv and explain that it was the only way to keep top talent. Top talent? These guys have been manipulating the system and cooking up whacky formulas so that they could sell gruel and pass it off as caviar. The system collapses, our tax money is used to bail out these clowns, and they still bring in record bonuses due to the influx of all the bailout money.

    I could go on for hours, its sickening, and people need to understand how the system evolved. Great topic that needs more attention.

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  5. what you do at the top of the pyramid doesn't really matter. it is moving from one rich pocket to another and as such neither enriching nor destructing the economy. being an absolute layman.. i simply dont buy this poor share holders argument. no shareholder is poor. he is an entrepreuner or a speculator and lives the risk associated with that form of business. thats all. so paying a big fat pay from share holder's money and all that is just a play of words and nothing much.

    you know what ramesh - i just did a mammoth shopping sphree - went to buy idli maavu and came back bombing some 2 K (most of them impulse in retrospect... of course there is a need but i didnt realize i had the need until i landed there ). and then one of the guys there who helped me carry all this loads of stuff back to my car. and then, i gave him a small tip. you could see the smile on his face. what i cannot digest is the pyramid. I of course am not comparing him with any of the white collar jobs, but at times i feel maybe it isnt really fair at the bottom of pyramid.

    I know it is the market forces of demand and supply but i somehow believe in a little bit of republican thought, there should be some better minimum pay at the bottom (beyond the 50 Yrs old minimum wages act) similar to a maximum pay. possibly it could also leave slightly lesser money for those on top balancing the equation by itself.

    I am really sorry for absolutely going off the topic and rambling all over the place.

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  6. @Vishal - Kiwi, for example, would argue that pay controls are meaningless and the market will always find a way to beat it. But I think shareholders are the right body to act.

    @Hopfrog - Its a real pity how no real reform of the financial services sector has happened in the US. Look at what is happening in commodity markets - same cycle of nonsensical risk taking is happening there.

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  7. @Sandhya - Never off the topic and very relevant issues you raised.

    The shareholder is not poor and often a blackguard. But that doesn't change the fact profits belong to him - not employees. You can have incentives linked to performance for employees, but not profit sharing.

    The salary at the bottom of the pyramid - I don't buy the sympathy. One of the great miracles of both India and China is that anybody (and that's really anybody) can find a job today if he wanted. Sure salary may be low, but its often enough to have a living. It wasn't like that 10 years ago, but today we cannot fill unskilled jobs. So for a person willing to work hard, there's enough money to be made.

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  8. BTW why is the Church having such obscene amount of assets?

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  9. @Zeno - Is there any religious organisation that is not rich ?? The Church, Sai Baba, Sri Sri Ravishankar, every religious organisation has lots of money. I am making no comment on their religiousness, at all - simply an observation that they collect a fair bit of money.

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  10. I do agree most religious organizations are rich. I was trying to make a point, Church has already lost the moral authority. It shouldn't be having wealth that too, too much of wealth and why should they talk about this?

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  11. Fairness and economics make strange bedfellows. The debate of whether fairness is a valid objective seems to be central to many debates in the US these days (even though it is not always cast as such) - executive pay, bailout, taxes,... But I think there is a significant part of the society that seems to be deaf to that word or why it might matter. I think it takes extreme backlash for the priveleged to realize why fairness was a good idea to begin with - I guess I am totally rambling but I dont think arguments of fairness are effective in business. But what I am not able to fathom is why shareholders are not able/ willing to demand more from these financial companies. I cannot complain about the pay when my retirement money is probably being invested in these companies and I passively sit by and watch. It is hard to say in absolute how much pay is too much and it has to be evaluated vis a vis the output. Surely these guys are not adding that kind of value. I think the profitability of many of these companies is largely smoke and mirrors and seems to be hard to conclusively prove it but for now I will have to be satisfied with my (rambling and incoherent) rant.

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  12. @J - No at all rambling or incoherent. I am struggling too with the concept of "fairness". Is there such a concept in business ? Or is just a manifestation of jealously in those who don't have. For eg, will anybody refuse a million dollar bonus on the grounds that he doesn't deserve it ?? Its only excessive if in the hands of others - rarely in our own hands. Touch one, this one.

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  13. If only life was fair. What really amazes me is that, its not very difficult to look through the charade and it took a church to take this stand. What stops ordinary people from raising their voice to such shams?!

    @zeno- Just because the Church is wealthy wouldn't make it immoral. I wonder how we got this notion in our tradition that being rich is a crime.

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  14. @Deepa - If only life was fair indeed ......

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  15. My God, I didnt know one could earn 10 times their salaries in these sectors. Thanks for explaining the logic of such decisions taken in the past. In the current scenario, its not fair at all.
    Yes, a wise decision by the Church.The voice of morality indeed!

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  16. @hema - 10 times is not any high number. Usually its much higher than that. HSBC earned kudos for restricting it to 10 !

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