Guest column: Paying the price

The debate over executive salaries isn’t really about fairness or equality. It’s more a reflection of society’s value.

By
July 30, 2010 15:30
MK SHELLY YACIMOVICH

Shelly Yacimovich. (photo credit: Ariel Jerozolimski)

 
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If you are fortunate enough to be among the 100 highest paid executives working for companies listed on the Tel Aviv Stock Exchange’s TA-25 index, it takes you no more than four hours of work to make as much as the average Israeli earns in a month. In 2009, a top-100 manager earned an average of NIS 540,000 a month, according to a survey by the Calcalist financial daily. Assuming that he or she works harder than the average prol – let’s say, 12 hours a day, 22 days a month – that comes out to about NIS 2,050 an hour.

In other words, the average top-grossing executive has earned by lunchtime in a single day as much as the average person grosses in a month (NIS 8,108). He only has to sit at his desk til noon that day to make as much as the average teacher (NIS 6,471). True, to make what a bank employee earns (NIS 14,107), he has to work until the late afternoon, and into the evening hours to make as much as an Israel Electric or Mekorot worker (NIS 20,285). Still, it’s not a bad way to make a living. The question: Is it justified? Apart from chief executive officers and others sitting at the top of the corporate totem pole, it’s almost impossible to find anyone in public life who will answer yes.

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Bank of Israel Governor Stanley Fischer has termed executive salaries unreasonable. Zohar Goshen, the head of the Securities Authority, has called the system for awarding pay packages to top executives flawed, and he terms income inequality socially unacceptable. The government is loath to put a cap on salaries, as MKs Shelly Yacimovich and Haim Katz have proposed, but it doesn’t dare ignore the issue.

BUT THE debate over executive salaries isn’t really about fairness or equality. It’s more a reflection of society’s values. Executive pay is excessive, but so is the take-home of champion athletes, movie stars, fashion models and celebrity chefs. Indeed, all over the post-industrial West income gaps have been widening for decades. But that’s fodder for policy wonks, not for newspaper headlines and bloggers.

Performers don’t take the heat for their earnings because the actor on the screen and the athlete in the stadium provide the masses with the entertainment they paid for. They are admired and envied, if not idolized. Not so a business chieftain.

His status is so low that no one cares what he wears to a party or what his views are on Tibet or animal rights. A CEO’s value in endorsing consumer products is nil. Even the mentally disturbed don’t trouble to stalk the chief financial officers.

Furthermore, a CEO is in charge of a large organization, and it is hard to credit his company’s success to his effort or vision. Anyhow, what he or she does is hard to fathom. That he restructured the company’s debt is met with a “huh.” Cut costs.

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Oh, you mean the boss fired people? His company launched a great new product. Ah, but the CEO didn’t design it. There are a few celebrity CEOs – Steve Jobs in America and Richard Branson in the UK – but if a business person has celebrity buzz it’s most likely because he’s notorious, not admired.

Why income inequality is growing in post-industrial societies is a matter of speculation. One idea is that the premium paid to people with most skills and education is increasing. Another is that deregulation and tax policies favor the rich more than ever. Entertainers can command high pay because their audiences are virtually unlimited. Television and Internet mean your earning power is no longer measured by how many seats you can fill in a single theater or stadium. CEOs benefit, too, from the mass market phenomenon; companies are so big that their compensation is a drop in the bucket relative to sales and profits. All of this can be defended on the grounds that these are market forces at work, and market forces are sacrosanct everywhere in the world these days short of North Korea.

IRONICALLY, IN the case of executives – the people who supposedly live the free market – the phenomenon of high pay seems to be mostly a case of market failure. Insiders decide on CEO pay packages in a surreal world of rich people awarding big salaries to other rich people. Shareholders and consumers are passive. The old notion that the risk-reward ratio of top executives is high – they make a killing when they run the business well and suffer the consequences by being fired or having their compensation cut when they fail – is a myth. But if executive salaries were simply an issue of business performance, it could be ignored by the politicians and the public. If shareholders don’t mind getting ripped off, why should the rest of us care?

The real problem is that sky-high executive pay is a manifestation of a growing income gap across society that threatens to undermine the foundations of democracy and equality. The rich, whether they are CEOs or sports figures, have access to too many resources and too much influence to ensure a reasonably level playing field for opportunities and advancement. Excessive wealth saps social morale.

Yawning pay gaps distort choices.

How can anyone justify going into teaching or community service when being a banker or a lawyer pays so much more? Nor does excessive wealth seem to have any particular utility. Would Partner CEO David Avner, the man who topped the 2009 executive-pay list, have worked less if he had received, say, a third of the NIS 9.9 million salary and bonus he received last year?

The issue isn’t whether widening income inequality must be reversed. But the problem is a lot bigger than CEO pay.

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