16 Feb 2014

Remuneration : how to address fairness, social peace and political stability ?

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I recently attended a conference from the Sacred Heart University (John F. Welch College of business) in Luxembourg whose title was : “Is income distribution a problem ? Should manager remuneration be capped ?


(1) Just 1 % of the world’s population controls nearly 50 % of the planet’s wealth, according to a recent OXFAM’s survey that was released just before the opening of the World Economic Forum in January 2014.
(2) The bottom half of the world’s population owns the same as the richest 85 people in the world.

Alfred Steinherr, Academic Director of the SHU Luxembourg gave an insight into some economic principles, the income distribution relies on and derives from.
In economics, income distribution is how a nation’s total GDP is spread amongst its population.
Income distribution picks up with wealth.
For long time, workers have been consuming what they earn and only the rich have had enough money to save. This is not surprising that the USA – although being one of the richest countries in the world – have one of the lowest saving rate. They are one of the leading countries with the highest income and fast growing inequalities !

This is not the level of income that is important but its distribution

In an ideal world, everybody is remunerated on the basis of its contribution to overall income, but … contribution cannot always be measured in a team. And what about the contribution of a policeman for instance ? There is no price mechanism ruling the mission of the police department and the assignment of their police agents.
There are also other situations where people earn reliable revenues : I speak about professions who have a monopoly to perform certain acts and when access can be restricted by a “numerus clauses” (for instance notaries, some categories of servants, etc … Some of these professions are overpaid compared to the work they do because no one can get in the profession because of the law.

Wealth is either inherited or earned. It must be outlined that the share of the labor income in the GDP (Growth Domestic Product) in the most advanced countries has decreased from 74 % in 1980 to 65 % in 2010. This can be put in perspective with the dramatic growing power of the financial activities that happened with the liberalization of the financial markets in the early 80’s during the Ronald Reagan’s and Margaret Thatcher’s era, respectively in the USA and in the UK.

As a matter of proof, the world-GDP 2007 was US $65.61 trillion when in the same year the global annual value of major financial asset market transactions reached US $900 trillion including foreign exchange turnover and stock market trading (excluding bonds and other over-the-counter transactions) … against a total value of world trade (merchandise exports plus commercial services) of $16.9 trillion !
Capital income has significantly increased since the liberalization of the world economy. While much wealth have been created with people trading on the stock markets … the unskilled labor has suffered from the movement of globalization that arose as a logical aftermath of the new market and trade policies driven by the leading countries. Unskilled workers have been replaced with capital (IT and machines).

The haunting question is : should remunerations be capped ?

Tony de Luca, Adjunct Professor of Management at the SHU Luxembourg, who hold leading positions with Barclays Bank and Philips, took the floor with a likely controversial introduction : “The issue of income distribution is rather emotional. Cap has never succeed to restrict compensations”.
He continued with stating that capping remunerations is both a wishful thinking and the outcome of bad and defeatist economics. Additionally, he raised the following question : “Whom should we delegate the decision of restricting salaries ?”.
Why some people earn more than others ? According to him, reasons are :
– a personal input that is intrinsically linked to some high responsibilities like CEO or senior executive
– business generating high margins like trading, mergers and acquisitions or consulting
– special scare skills (surgeons, lawyers, artists and athletes)
– innovation and value creation (entrepreneurs)

Some of these cited reasons might be questionable. What about many professions and duties that strive to provide solutions to the negative externalities caused by the dominant economic system : damage to the environment, social issues resulting from stress or bad working conditions in some industry sectors like mining, textile, etc … How can we measure the sometimes non tangible outcomes delivered by those who contribute to solve or avoid these damages (people from the NGOs’ sector; some categories of medical care staff, etc …) ?

If we have to cap remunerations, the better way to do it would be to delegate the case to active shareholders in the private sector and to active citizens in the public sector”, Tony de Luca said.

Rising inequality is an issue, but is it a cause or a consequence ?

According to Tony de Luca, there is any longer average in term of remuneration. China, India and Eastern Europe along with internet with seamless connectivity have broken the long-established markers prevailing in the old economy. “Our democracies don’t seem to be aging very well”. They make matter worse with sustaining a huge proliferation of protected “elites” like the civil servants.

Possible policy guidelines would be :
promote higher education and meritocracy
– increase competition with encouraging entrepreneurship and innovation
rejuvenate the democracy with capping the remuneration of politicians

Tony de Luca concluded with saying that a great deal of the inequalities come from monopolies. Furthermore, shareholders have nothing to say in term of managerial remuneration, so far. Companies’ boards must be more responsible in regard with the shareholders.

Some benchmark data :
80/20 ratio for measuring remuneration’s inequality (ratio between the 20 % highest income and the 20 % lowest income) – Source : Eurostat 2012
Spain : 7,2
France : 4,5
Sweden : 3,7
Norway : 3,2
Luxembourg : 4,1


(1) World Economic Forum (2013) ‘Outlook on the Global Agenda 2014’, Geneva. http://www3.weforum.org/docs/WEF_GAC_GlobalAgendaOutlook_2014.pdf

(2) Credit Suisse (2013) ‘Global Wealth Report 2013’, Zurich: Credit Suisse. https://publications.credit-suisse.com/tasks/render/file/?fileID=BCDB1364-A105-0560-1332EC9100FF5C83. And Forbes’ The World’s Billionaires (accessed on December 16, 2013) http://www.forbes.com/billionaires/list/

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