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Hi Learn and Perform subscriber

The news in the United Kingdom for the entire month was about capping executive pay and unemployment benefits. While the euro zone crisis was spiraling into a serious economic crisis in Europe, the conservative rich Republican Party candidates were battling in the primaries for the right to contest against President Obama. The positive economic news in the USA was a little heartwarming given the world challenges. Back in Asia, talks of elections in Malaysia and the ongoing battle against corruption in India took centre stage. Now to the e news:

Capping Executive Pay
A colleague of mine from the UK with extensive Asian experience, particularly China, once remarked ‘ in communism, man exploits man and in capitalism, it is the reverse.’  Again, it is not either this or that system; it is about moderation and balance.

The case in UK where the Chief Executive of Royal Bank of Scotland was offered a million shares on stock options over a three-year period drew lots of protests. While I thought the amount was not huge enough and there was merit in using stock options as a retention tool, the public view ( and my sons views) was that he had a base pay and the bank had still not turned around and hence the shares allocation was inappropriate. We saw from the US experience the howls when President Obama proposed a cap of US$ 500,000/- per year for top executives.

In the post economic scenario of financial institutions collapse, there has been much anguish over the state of executive pay. Incentives form the backbone of motivating people to perform but when crony capitalism creeps in, we have numerous challenges. The example of Greece, Ireland and Iceland grow out of a systemic failure, a situation where problems grew in not capping greed not executive pay, necessarily.

Banks and some organisations that have made huge profits have paid out huge bonuses and salaries to their executives that have seemed greedy and inappropriate given the current economic scenario.  While the word Corporate Social Responsibility seems to be the talk of the day, Social Responsibility has pretty much been forgotten.  This grows out of an individual’s values, when is enough, enough.

We close post office and bank branches among rural communities, as they are no longer profitable; they are a cost. We allow corporate raiders to come in and close down all these branches that deprive communities of basic amenities. And, what do these corporate behemoths do? They strip the company of all the assets, pay themselves huge bonuses and dividends and then raise the cost of basic services, as it is no longer viable to offer service to the people. The concept of public service again is no longer a part of the executive values armour.

Incentives form the core of the capitalist model.  We know from history that communism failed due to a lack of individual incentives. Executives need to be paid well for the hard work and the risks they take.  Yet, the amount of top executive pay in recent years has been ugly with cases of greed far outstripping contributions. The question is then only on the quantum. What is the amount that is socially appropriate? What is the quantum that motivates an individual? Take the case of Mitt Romney, a Republican Party aspirant for the Presidential elections. He pays less tax than a Secretary. This is what prompted the Warren Buffet rule to reframe the tax system.  In his case, he contends that it is ironic that he pays a lower rate of tax than his Secretary.  Is that fair or is fairness no longer applicable in this world? Or should we stop rewarding entrepreneurs and risk taking, people who create value.

Look at all these organisations being helped to stay float through government interventions. Most of them, in these cases, are being now subsidised by taxpayer’s money and the top executives are not entrepreneurs who innovated and created a new product or service. They did not take personal risks. These are individuals who at best can be termed as bureaucrats who run a huge bureaucracy to deliver the organisation’s products or services. Of course, in the world of management, we call them as leaders. They attempt to stay as long as they can and in most organisations succession is not in place, as they are not aligned to personal interests. They are not the Bill Gates and Steve Jobs of the world.  In these scenarios, shareholder and government intervention to cap pay is a welcome one. If these top executives desire to make much, much more money, they should step down, take a personal risk and go into the world of entrepreneurship. No one will quarrel with his or her decision.

Again, moderation and balance rather than flawed and parochial arguments have to take centre stage. While no one in a right frame of mind should dispute the value of individual incentives to motivate executives, in the absence of an equitable blend of fairness and motivation, I think the intervention of the Government and shareholders to cap executive pay, particularly, in organisations supported by Governments or run on tax-payer monies, is necessary.

Enjoy the month ahead. I will be in touch next month

With best wishes



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