Opinionista Johann Redelinghuys 11 May 2014

Inequality: the eternal conundrum

In the same week last month, two stories in the media showed the extent of the wage disparity between two groups of people. The joint chief executives of Standard Bank each received compensation of R28,8 million; a little more than R2 million per month. The striking platinum miners, meanwhile, were fighting to increase their entry level wages from R5,000 to R12,500 per month.

It is pointless trying to find any common ground between these two totally divergent groups, and no one is saying that we are comparing apples with apples. The gap, however, is bewildering.

An immediate reaction is, “Can something not be done about it?” The mining bosses say that South African mining is already battling to return profit to the shareholders and if it increased wages as demanded by the unions, they would go out of business. The cost of South African mining is already high and losing its competitive edge in the international market. But even if wages were raised, one wonders how those having to feed and care for their families manage to do it on the money they earn. Poverty, exacerbated by financial ignorance with garnishee orders and multiple family responsibilities, seems to have no end in sight.

It is no wonder that a fledgling political party like the EFF could gain so much traction and voter support in such a short time, when their promise to the poor and mostly unemployed is financial freedom. On a practical level, there don’t seem to be too many winning strategies for the real alleviation of poverty. Marginal improvement is probably the best that can be hoped for.

To try to close some of the wealth gap at the lower end appears to be unlikely, and that only leaves the other end of the scale to be addressed. It is to try to reduce and to moderate the incomes at the upper end. There are various levels of outrage, not only in South Africa, but also in much of the Western world, about the extravagant lifestyles and eye-watering compensation packages of senior executives.

Not to labour the point, but take just two examples from the mining industry. Mark Cutifani, CEO of AngloGold, in 2012 earned a total compensation of R20.3 million, and then cashed in some of his share options to give him a total for the year of R43 million. Nick Holland at Gold Fields earned just less than R20 million in the same year, but added in some share proceeds to receive a total figure of R45.3 million.

Sensing the groundswell of criticism after the announcement the apologists for Standard Bank immediately pointed out that the CEOs of all the competing banks were more or less in line with their numbers. Cited annual compensation for Maria Ramos at Absa was R28.65 million in the same year, Michael Jordaan at First Rand received R22.1 million and Mike Brown at Nedbank pocketed R32.5 million; all of them presumably laughing all the way to their respective banks.

Fierce critics of this explosive growth in executive income, like journalist Ann Crotty, say that the excuses of scarce talent and the need for top executive retention are nonsense. It is up to the remuneration committees of the various companies’ boards to rein in the situation and to become more responsible. The problem is, how does one decide what is reasonable and how can an acceptable standard be established?

In several countries now, amidst growing outcries, there are initiatives to regulate and develop legislation that will cap top end executive salaries. One of the most valiant attempts has been in Switzerland. There it was decided that an acceptable ratio would be for the highest paid employee to earn no more than 12 times the amount earned by the lowest paid worker. Somewhere there was a rationalisation that someone at the level of a CEO should not earn more in a month than one of his lowliest paid workers would earn in a year; hence the 1:12 ratio. After much agreement that this would be a sensible course of action to follow, when it was put to a vote, the proposal was defeated and had to be scrapped.

One wonders if the conservative and rigorous Swiss are unable to make such a control work what hope there would be in the more profligate countries like the USA. There the average ratio of 1:354 is considered acceptable based on a survey by John D. Sutter of CNN. It means that the top end US executive earns about 354 times more in a year than the worker at the lowest end of his business.

Driving the mandate to find a more equitable arrangement there is an underlying assumption that we should try to build a society based on greater equality and a more fair spread of the country’s wealth, just as Julius Malema says. It is unfair for the rich to have so much and the poor so little. If the same thinking is applied more widely, is it fair for some to have big houses with spare rooms while others have to live in shanty towns? And what about schooling, when some have the benefit of good quality private schooling while others suffer the indignities of schools without toilets or blackboards and operating under the trees? It can’t be fair. But who will decide what is fair?

Is it conceivable that there should be price control on executive talent? Could it remotely be linked as a standard to the profit performance of the company or its sustainability rating? Any commodity regulated by price control is inevitably set up for corruption and the violation of itself. Price controlled CEOs would no doubt go the same way.

Some of those trying to understand this conundrum say that executive talent and leadership operates in a market, and like all markets there are prices based on supply and demand. Skilful and talented business leaders earn their high packages because there is a world-wide shortage of them and they are sufficiently mobile to operate anywhere in the world. They earn the big numbers because boards representing the shareholders approve their packages. Miners who are relatively less skilled, on the other hand, are plentiful. There are many more of them than are needed directly in the industry and their price is therefore lower. With all the pain experienced by the labour unrest, mining bosses are talking increasingly of mechanisation. This will obviously cut the number of jobs and put more people onto the streets. Free market advocates say let the market determine the prices of skill and talent like it would for anything else, and don’t try to manipulate it with unsustainable regulation.

Every ambitious country aspires to the classic Scandinavian model of a big and stable middle class, with all citizens earning enough to live reasonably well. The reality is that almost everywhere now the wealth gap is getting bigger and populations are increasingly polarised.

Will we always be facing the simplistic and disagreeable option of having to choose between the benefits of state regulated socialism just to find a better deal and greater equality, or must we stay with rough-shod capitalism and live with its dark downside; poverty and inequality? DM



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"Why would Kim Jong-un insult me by calling me 'old' when I would never call him 'short and fat?' Oh well I try so hard to be his friend - and maybe someday that will happen!" ~ Donald J Trump