Opinionista Johann Redelinghuys 16 July 2013

The inequalities of the wage gap won’t go away

Trying to bring the compensation packages paid to top-level executives closer to wages paid at the bottom of the corporate hierarchy is a goal that is unlikely to be reached.

In the recently released PwC report on executive compensation, it is estimated that the median total compensation paid to JSE listed company CEOs is 53 times higher than the lowest income group.

The report also lists the initiatives by various corporates to rein in the levels of CEO compensation. A separate indicator comes from Statistics SA, which says that the average worker in South Africa earns R170,000 per year and that an executive director gets 18 times more.

These disparities are the cause of much comment and hand-wringing, particularly from politicians, but also from concerned individuals in the broader media. All seem to agree that the gap should be closed somehow. But no one says what an acceptable gap should be. Or who will decide how an acceptable wage-gap could be implemented throughout the economy.

In Switzerland someone came up with the notion that a CEO’s package should not be more than twelve times bigger than that of a person at the bottom of the pile. An Isopublic poll found that 49.5% of the population agreed with this. But why twelve times? How does the formula work?

Responding to the outrage that followed the banking crisis of 2008 and the much-publicised CEO packages of banks that had to be rescued by public funds, there is widespread encouragement for legislation to control the compensation in the top ranks. Switzerland the USA and the UK among others are all working toward this goal. Informed observers are doubtful.

Underlying much of the unease people feel about the wage-gap is the way that it causes a sense of unfairness. It seems unfair that some should get so much and others so little. We like to think of ours as an egalitarian society where equal opportunities for all should not allow practices that apparently are so unequal.

But there appears to be confusion here. There is no doubt that equality should be a mantra of any democratic society and a goal to which we believe everyone should aspire. It should be a constitutional right. It is right to have equality before the law. It is right to have gender equality. But we only have to look around to realise that we are not all equal. We don’t live equal lives and we don’t have equal opportunities. But while no one is saying that there should be equality of compensation for everyone in business, there is an underlying sentiment which seems to wish that it could be so.

All the machismo posturing of Malema and others about “economic freedom” feeds off the belief that there is exploitation of the workers and that people at the top are benefiting unfairly. His mission, it would seem, is to nationalise anything that could be nationalised and that the “the people” should have a greater slice of the economic pie. Ignore for the moment his BMWs and the Breitling watches and the R16 million house and the other indulgences, his professed philosophy is that of socialism and “economic liberty” for all. It is about equality, apparently.

But the truth, of course, is that we are not all equal. We do not all have equal ability or equal talent or equal capacity to achieve and excel. As much as we would wish to have the same opportunities for all children and a decent education for each one, it is not now, and is unlikely ever to be possible.

Some students endowed with greater ability will do better and will go on to university and successful careers. Others, despite their best efforts, will not get there. They cannot all do equally well. Different home environments, different genes and different personalities will produce different levels of success. In due course they will perform differently and will be rewarded for their efforts differently. The wage-gap awaits everyone.

It is when it exists in public companies that have to subject themselves to scrutiny that we hear most about it. But inequalities caused by hierarchies abound everywhere. Why should a Vice Chancellor of a university earn so many more times that of a junior lecturer? Or why should the fortunate shareholders of a successful and profitable company earn more from their dividends than a hard-working employee on the shop-floor? In a capitalist democracy don’t look for the equality and apparent fairness of an old-style communist society.

Unusual talent in our society will always be very well rewarded. To get to the top in any field requires skill dedication and talent. Look at the top sports personalities or the big rock stars. They will forever command greater rewards.

Last year U2 made $195 million for Bono and Co. Bon Jovi made $125 million and Elton Jon $100 million. David Beckham personally made $44 million and Lionel Messi $39.3 million. What about all the other hard-working footballers and musicians? Is it fair that they should have so little in comparison? How big is the wage gap there?

Of course it’s not the same thing as the difference in pay for those in business. But we recognise that the top sports stars and musicians are unique personalities with outstanding talent. No one begrudges the money they make.

So what about the stars of business? What about the celebrity CEOs? There are also a limited number of them and their talent is just as rare. Look at how many CEOs aspire to top performance but don’t make it. Look at how many are stretched beyond their ability and collapse or fall into corruption under the strain of it.

If we are not comfortable with Lloyd Blankfein of Goldman Sachs earning $39 million in a year when his company made a loss, how about Whitey Basson, admittedly an extreme example, who in 2011 was paid R32 million in salary but exercised stock options accumulated over 40 years for another R594.5 million. At that time, Christo Wiese, chairman of Shoprite, said Basson had built a R1 million company into R53 billion enterprise and that he is a man “with a rare talent”.

Should the ‘rock-star’ CEOs like Michael Jordaan, Brian Joffe, Adrian Gore, Mark Lamberti and Sizwe Nxasana not also be classed as ‘rare talents’? And then what about the many other C-Suite executives who have had to claw their way to top spots in the corporate playing field?

The reason the top sports personalities and musicians can make so much money is because they are so rare and because the fans will pay what they have to, to be entertained by them. The reason the top CEOs are paid so much is because they are also rare and boards will willingly pay them what the CEO-skills-market demands.

No matter how unfair it may seem to some, the wage-gap cannot be ‘managed’ away. It does not exist because the authorities have been lax or have failed to control matters. It exists because there are great differences in the talent and skill needed to build a business on the one hand and to work at its lower end on the other.

We should stop doing the multiples of difference between compensation at the top and the bottom ends as the various compensation surveys regularly do. We should take account and do the multiples instead of responsibility and skill differentials at the top and bottom levels of companies. DM


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