Live |

August 30, 2007

PM’s call and CEO salaries

Filed under: economics — odrf @ 8:40 am

 T Ram Mohan writes in Economic Times on Rising trend of  salaries of Indian CEOs….

+

Many in the corporate world and the media have been dismissive of Prime Minister Manmohan Singh’s impassioned call for restraint on executive pay in his speech at the CII last week. The PM did not hector, he merely appealed to industry’s good sense. That good sense is not showing. Executive pay, we are told blandly, must be market-determined. Whether the market does a good job of determining pay is controversial everywhere. Without getting into this controversy here, this much can be safely said: the prime minister’s plea for moderation is not as outlandish as some would have us believe. For at least four reasons.

First, leaving aside the United States and, perhaps the UK, executive pay tends to be modest in most parts of the world. The knee-jerk response to this statement often is: that’s why the US is a lot more dynamic than other economies. Well, there’s a lot more to the dynamism of the US economy than big pay packets for executives — vibrant financial markets and huge subsidies for research coming out of defence budgets, for instance. Besides, prosperity is not confined to the US and there is no dearth of successful firms in, say, France, Germany, Scandinavia, Switzerland and Japan. Clearly, economic success is not just about outsized pay for top executives. There is the danger that the Indian elite’s admiration for things American may be leading to too close an emulation of the US economic model.

Secondly, the sharp rise in executive pay in the US has to do with a large variable component in the form of stock options. The argument for stock options is that by giving executives a long-term stake in their firms, it aligns incentives closely with performance. This is fine in a context in which firms, especially large firms, are run by professional managers.

But the Indian corporate landscape is very different. It is dominated by family-managed businesses and public sector firms. CEOs in family-managed businesses and often others at the top are from the family. They have large equity stakes in their companies. They receive substantial dividends that are not taxed in the recipient’s hands. Why would they need to pay themselves huge salaries? True, there are professionals as well at the top who need to be taken care of. But, even in the US, it is the CEOs who are incentivised the most. There is a chasm that separates the CEO’s package from those of other executives.
 

Advertisements

Markets mechanics and inequality trap

Filed under: economics — odrf @ 6:24 am

An article written by Swaminathan S Anklesaria Aiyar in Economic times……
 

The slump in global stock markets since July has wiped out an estimated $5 trillion of wealth, five times the GDP of India. So, world inequality has fallen dramatically. Are poor people across the world celebrating the great reduction of global inequalities? Are socialists celebrating increased equality ? No, not at all.

But why not? For years, analysts have worried about rising inequalities in India. Rapid growth has sent the stock markets soaring, and several Indians have entered the Forbes list of top billionaires of the world. Simultaneously, 300 million remain below the poverty line. This stark contrast has evoked much outrage.

Prime Minister Manmohan Singh says that unless the poor participate in fast growth, uprisings could disrupt our nationhood – over 150 out of 600 districts are affected by Maoist violence. The same theme is echoed in a recent study of Asian inequality by the Asian Development Bank. The ADB chief economist has been widely quoted as saying that high levels of inequality disrupt social cohesion, and could lead to civil war.

If this were really true, then the stock market slump should have healed social tensions. An Indian Express story on August 12 estimated that the richest five Indians had lost more than $10 billion in the previous fortnight. The total wealth lost by all shareholders was $52 billion (Rs 210,000 crore), almost equal to the GDP of Bangladesh.

So, inequalities in India have fallen dramatically. Not even the most draconian tax measures could have reduced the wealth of shareholders by $52 billion.

But are the 300 million poor people of India celebrating? Are landless labourers in Bihar delighted that the wealth of the Ambanis has suddenly fallen by billions? Are the tribals of Chattisgarh and Jharkand joyous that the Tatas have become poorer? Are illiterate Dalit women, the most oppressed and powerless section of our population, ecstatic that the stock market slump has improved income distribution?

Of course not. And this has consequences for theories of social tension. Now that the stock market slump has significantly improved India’s Gini coefficient of wealth, will Maoist insurgents in Chatttisgarh give up insurrection? Will ULFA in Assam cease its depredations because of greater equality between the people of Assam and those of Dalal Street? Will the militants in Kashmir become less militant because of an improved income distribution?

To even suggest this would be farcical. Yet that farcical notion is deeply entrenched in much socio-economic analysis. The millionaires of Nepal are deeply invested in Indian stock markets. Does the ADB think that their stock market losses, which have reduced inequalities, will ease tensions in the neglected Himalayan region of Nepal?
 
 

Blog at WordPress.com.