Friday, October 26, 2012

Preposterous salaries are a moral issue

(First published in the Nelson Mail and Manawatu Standard, October 24.)
The New Zealand Herald published an opinion column last week in which a University of Waikato student, Ryan Wood, suggested that what we need in New Zealand is not a minimum wage, but a maximum.
He pointed out that the former chief executive of Telecom, Paul Reynolds, reportedly made $6 million a year – a figure he described as obscene. What’s more, he argued that Reynolds’ salary package didn’t seem to bear any relationship to how well Telecom did under his leadership.

Wood suggested that as long as the government was planning to introduce a low, “starting-out” wage to encourage employers to hire more young people, perhaps it should also consider imposing a ceiling on executive salaries.
He argued that if executive salaries were capped at, say, $200,000, talented and ambitious business people would have an incentive to start their own firms, because the only way to get rich would be from the profits they generated as owners. That would be good for the economy because it would create new businesses and new jobs.

I’m sure he wasn’t being entirely serious. In an open market, companies have to be free to determine their own remuneration packages. The alternative is a rigid, state-controlled economy. We tried that under Robert Muldoon and it brought the country to the brink of ruin.
Besides, in an open, global economy, good people would simply head overseas if they couldn’t earn what they thought they were worth here.

But Wood’s column wasn’t entirely tongue-in-cheek either. Arguably the most distasteful aspect of economic deregulation has been the way executive salary packages have been inflated beyond all reason.
Most people scratch their heads in disbelief at the money paid to individuals like Reynolds (though it’s unfair to single him out, since grossly inflated salaries are endemic in the corporate sector).

It’s not just that ordinary New Zealanders can’t believe any single person is worth that much. They also have difficulty understanding how anyone could want that much, given that there’s a limit to how many ostentatious houses, exotic cars and luxury yachts a person can own.
Once you count your annual income in the millions, it begins to seem almost academic. I mean, how does anyone actually spend all that money?

I wonder too how people like Reynolds can, in conscience, accept that much. Some sort of psychological self-justification mechanism must kick in – a sense of entitlement, perhaps, whereby they delude themselves that their “skill set” is so rarefied, so unique, that a stratospheric salary is theirs as of right.
Paradoxically, they rarely if ever seem to get penalised if the firm under-performs or runs into trouble, as happened to Telecom under Reynolds’ watch when the launch of the company’s XT network went pear-shaped.  Ah, but the apologists for the corporate sector say that’s when the CEO really has to perform. See the light burning in his office late at night? See the furrowed brow? He’s working harder than ever. It’s only fair that he should be compensated.

I suspect that chief executives’ reward packages, which typically consist of bonuses, incentives, travel perks and discounted share allocations, are deliberately complex so that no one other than accountants and HR advisers can understand them. But ordinary people are not so silly that they can’t see that the boss invariably comes out ahead, even when workers have to be laid off to ensure the company stays profitable.  Funny, that.
And let’s not kid ourselves that the problem is confined to the top level of the corporate world, because the entitlement syndrome has permeated almost every sector of the economy: lawyers, surgeons, sportsmen, entertainers – you name it. I know of high-profile broadcasters who charge thousands for a simple MC-ing gig (little or no preparation required – most could do it in their sleep), and I heard recently of an advertising guru whose daily consulting rate is $10,000.

Public servants don’t miss out either. In fact there are probably fewer checks on the upward movement of public service salaries than in the private sector, since government departments don’t have to answer to shareholders whose beady eyes are trained on the bottom line.  
Only last week, the ACC’s annual report revealed that the scandal-plagued corporation had 330 employees earning more than $100,000 a year.

Out of curiosity, I checked the annual report of the New Zealand Transport Agency – hardly a glamorous department. In 2011 the agency had 264 employees on salaries of more than $100,000 (I stopped myself from using the word “earning”). The chief executive, Geoff Dangerfield, gets more than $600,000.
I find these figures extraordinary, but it seems fair to assume they are indicative of the public service as a whole. It’s hard to see any rational, still less moral, basis for this, least of all at a time when the economy is struggling and New Zealanders are justifiably concerned about a growing disparity between rich and poor.

This used to be an egalitarian society. It still has something of that spirit, but it’s steadily being eroded.
I don’t share the simplistic view that the solution is more redistribution of wealth by the state.  Imposing higher taxes on the well-off, who already contribute a greatly disproportionate share of tax revenue, risks stifling legitimate enterprise and driving the creators of wealth (and jobs) overseas, where there are any number of countries ready to welcome them.

Neither will the gap between rich and poor be closed by increasing benefits or making more people dependent on welfare, as we frequently hear argued. Benefits are a poverty trap – the evidence is overwhelming. Households where someone is working, even on a low income, consistently do better than those on welfare.
Yet inequality does have a corrosive effect on social cohesion. It creates a sense of “them and us”. So what, if anything, can be done about the widening gap that sets over-generously remunerated corporate executives and public servants apart from people who drive buses, stack supermarket shelves and look after the elderly in rest homes?

I believe it’s a moral issue as much as an economic one. It might sound quaintly old-fashioned, but what New Zealand needs is more restraint and less greed; more modesty (now there’s a truly ancient-sounding word) and less self-exaltation. These are things that can’t be achieved by legislation.


Brendan McNeill said...


Good thought provoking article. We have no choice but to allow for market salaries to prevail. The State sector strikes me as a somewhat artificial market, but they also compete for executives just as private enterprise does.

Your concluding comments go to the heart of the matter. It speaks of human character and virtue. Again, a less common word in usage these days.

To be fair, some of the most wealthy people I know are also some of the most generous. This point is often lost on those who rage against their wealth.

However, I'm totally convinced that private individuals deciding which charities they prefer to support is always going to deliver a much better outcome for society, than having their wealth taxed from them and redistributed by the State.

I'd much prefer that we chose to celebrate the success of others, and congratulate them on their good fortune, than to be found whining and complaining about their circumstances.

Kiwiwit said...

We should allow the market to dictate what senior executives are paid because, as you rightly point out, the alternative is economic dictatorship a la Muldoon. The problem is not too much market but too little. In today's crony capitalism, where the main role of CEOs is negotiate with the politicians and bureaucrats who who have far more say over the fortunes of a business than its shareholders, it is little wonder that senior executives are not penalised for poor decision-making.

In a true market economy, guys like Reynolds (or, to be fair, his predecessors - because Reynolds has actually turned around Telecom from near-total destruction) wouldn't last more than a few months in the job if they weren't making the best decisions for shareholders.