Business Unusual

If a minimum wage is a good idea, what about a maximum?

Despite the line about money not buying happiness, and there are studies to back that up, what you earn is still a major element for any employee.

For those on the bottom rung, that makes sense, you really do need to earn enough to live. For top executives though, money should be the least of your worries.

It would not appear that way given the rise in CEO pay. In the US the ratio of how many times more a CEO earned from the lowest paid worker rose from 20-1 in the 50s to 120-1 in 2000 and was over 200 times by 2013.

Fat Cat Tuesday is a term coined in the UK which looks at the date in the year when top bosses would exceed the earnings of the median UK worker. For 2016 it was Tuesday 5 January. But that was if the boss began his year on the 4th and worked a 12 hour day!

In South Africa, the top 10 JSE earners would need less than two days to earn what an average South African earns in a year.

But when you consider that 60% of South Africans earn less than R5000 a month, then the average Top 10 JSE CEO earns their annual salary before going home on his first day. The highest paid CEO would have passed it by lunch time.

Percentage of total income of the top 10% in a country. SA and Namibia are the highest with over 51% of total income being paid to the top 10% of earners. credit: indexmundi

The numbers for middle of the road CEOs are far better, but even then they would have earned the average worker’s wages in a month and the majority of South Africans wages in five days.

This piece does not seek to make bosses villains or workers victims, but rather to consider what the future holds if we don’t address it.

There are three factors to consider.

  • Income distribution
  • Wealth distribution
  • Social safety net

While the examples above consider income, most executive pay includes an element that contributes to wealth creation: shares. Generally South Africa has done relatively well in addressing income disparity across income groups. But that is not the case with wealth distribution.

Wealth

The top 10% of the SA earner also controls 90% of the wealth. This is a legacy issue of affluent families passing the generational wealth on from one generation to the next. Changing this is key to addressing the overall issue. Wealth comes from owning assets that either generate income or appreciate over time. Shares, property, collectables like artwork, pensions and arguably a good education.

Redistribution of current assets could work but would be a very delicate process. Perceived instability of an asset’s ownership could negatively affect the value of the asset. A compulsory company share distribution or a property ownership change could see the share price or property value fall. How to structure such a scheme is likely to be complicated and likely to be challenged legally depending on what is suggested.

The alternative to incrementally address the issue will take a long time, at least a generation if not longer.

Although a good education and well funded pension will go a long way, they can’t be willed into existence and will be very costly given how many lack it. Other interventions like special interest rates for home loans or the expansion of share schemes should be explored.

Social safety net

The social safety net is often overlooked and includes issues like health and safety. In the US studies have shown that inequality has an impact on public health costs and that addressing it could see not just a reduction in the cost to provide it, but a lower need for it too.

Better services like security and improved amenities should both lower crime and the impact of it while lowering the stress related to the fear of living in an unsafe environment. It would also spur an increase in property values; creating increased long term value.

Socialists may agree but why would business purists want to change focus from getting the most out of its staff and improving shareholder value and profits in order to address the country’s social issues?

A potential solution

Alex Edmans of the London Business School argues that delivering on this sort of environment is great for profits - safe, healthy, educated workers are more productive. They would then also be part of a more affluent society which is needed to consume your products or services.

He lists three aspects of executive pay that fosters long-term growth over short-term profits by focusing on:

  • Simplicity
  • Transparency
  • Sustainability

His ideas may soon be tested by the Royal Bank of Scotland which is looking to revise how it compensates its executives.

The debate is ongoing in the UK as Labour Leader Jeremy Corbyn has called for a review of regulations that, while not capping maximum income, look at a ratio that should not be exceeded.

Mandatory reporting of the ratio of top earner to median income was going to be a requirement in the US from this year under the Dodd-Frank Act, but it appears the revisions brought by US President Trump and the Republicans will see it scrapped from a revised bill replacing the current act.

Not that the US is not also seriously looking at the issue. Many countries have addressed this in the past, although a cap on high salaries was not as popular as a regulation to adjust the minimum. It appears that a change to the minimum is more likely than a reduction in CEO pay in the US.

Switzerland considered it in 2013, but voted against it.

Ultimately the best solution would cater for a practical minimum to ensure all workers can get by; a means to incentivise middle income workers in a way that will not add to the wage bill but rather increase wealth creation via share schemes. While offering executives similar share deals, requiring them to be held for at least the period of their terms, should see a focus on the long-term growth of the company and by extension an increase in the share price, notwithstanding external factors.

This is a massive simplification of a very complex issue. Anyone claiming a quick fix is either wrong or has not considered all the implications.

One thing remains true, it has to be addressed. Failure to do so may not only lead to the erosion of the the long term sustainability of traded companies but of society too.

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