HomeBusiness DigestBrett Chulu: The politics, economics of executive pay

Brett Chulu: The politics, economics of executive pay

GLOBALLY, executive pay is getting unprecedented airplay.

Ebrahim Patel, the South African minister of economic development unveiled the New Growth Path (NGP), an economic development blueprint for SA.

One reader, in a SA weekly paper, cynically suggested that Patel should become a South African Airways pilot, the intimation being that the minister though not qualified as a pilot would “destroy no more than 200 passengers” compared to “destroying the entire nation”. This sarcasm, though irreverent is relevant.

It betokens the strong resentment that government intervention in the markets (including human capital) attracts from various interest groups.

Rich dad, poor dad
Patel’s NGP is proposing a cap on pay for anyone earning in excess of R550 000 per annum, roughly about US$6 500 per month. Specifically, the NGP wants any pay increases for this category not to exceed the prevailing inflation rates.

However, for workers at the bottom of the pay food chain, Patel wants the pay increases to be marginally ahead of inflation. Patel is effectively calling for the de-Darwinisation of pay: higher relative increases for those at the bottom of the pay food chain.

There is no guessing Patel’s proposal is a concession to the Congress of South Africa Trade Unions (Cosatu)’s ideological whims.

Cosatu offers no apology for its leftist (pro-poor) beliefs. Cosatu evangelists have a clear message — SA must be a developmental state that is sensitive to the pro-poor agenda. And Cosatu has the political muscle. Cosatu’s membership dwarfs the official membership of the ruling party, ANC. When Vavi speaks Cosatu membership listens.

In any case Patel was deployed by the left to stand up to the pro-business agenda. One of Vavi’s signature sound bites is “crass materialism”. Cosatu reads NGP to mean No Greed Please. For business, NGP means No Gross Profit, also read No Growth Path.

Cameron’s dilemma
In Britain, top pay plays politics and economics.

Britain’s once flagship manufacturing industry has been on the decline. Britain’s economy is now post-industrial, meaning the services sector dominates. The doyen of British economics is now the financial services.

London is home to powerful financial movers such as hedge funds and investment bankers. In fact, no more than five banks in Britain are British. Foreign banks are in excess of 20. A significant chunk of Britain’s tax revenues comes from this sector.

Excessive bonuses bankers and other financiers have been receiving are generally accepted as having been one of the drivers of the global financial catastrophe. The bankers took advantage of unlimited leverage. Simply put, banks could lend without limit.  Therein lay the problem of excessive pay. The more they lent the bigger the profits they got. That meant bigger and bigger bonuses. The bigger the bonuses grew, the bigger the appetite for more.

Financial geniuses came up with more and more complex financial instruments. On the eve of the global financial implosion you had 20 year old traders in London holding debt paper that was linked to some poor and unemployed borrower in the US and a pension fund in Hong Kong, promising repayment of debt, but not having the foggiest of ideas of who the principal debtor was!

When the world woke up from the midnight of its financial nightmare, leaders of the G20 resolved to tighten banking rules and come hard on bankers’ bonuses. The proposed Basel III banking rules are limiting lending to 33 times tier one capital. Tier one capital which includes shareholders’ funds is considered to be high quality capital.

Currently, Zimbabwean banks, on average are lending no more than 10 times their tier one capital.  That is very conservative. The Committee of European Banking Supervisors in December last year passed a rule. For bonuses in excess of US$1m, only 20% can be given in cash, the balance being in the form of shares.  But they have to pay tax using cash and not shares!

The new coalition government led by David Cameron is proposing to tax bankers’ bonuses, in addition to EU bonus curbs, clearly a conundrum for the coalition. One of the pillars of Cameron’s economic recovery strategy is reversing Britain’s deficit through fiscal discipline by cutting government expenditure and raising taxes.

For instance, Vat is climbing from 17,5% to 20%. However, a lingering fear hanging over Westminster is the possible relapse to the bankers’ pay profligacy of yesteryear, possibly leading to the mother of all financial crises.

That’s prodding Cameron to rein in bankers’ pay. Taking that path has a potential economic and political cost.

If Cameron goes ahead with the threat of taxing bankers’ bonuses, there is an attendant fear that the rainmaker financial institutions will flee to other financial hubs such as Singapore and Hong Kong. If that happens, Cameron’s government will lose massive tax revenues, given that the engine of British economics is the financial services sector.

That has the potential of defeating Cameron’s policy goal of hauling Britain out of its current deficit hole. Politically, that’s suicidal. Cameron was whisked to number 10 Downing Street because British voters believed he would be the Joshua to take Britain across the raging Jordan River of Britain’s economic woes. Will Cameron play politics, talking tough on bonus caps but going soft on action?

Republicans vs Obama
In the US, President Barack Obama has acceded to Republican pressure to extend tax cuts for the rich, against his electoral promise to increase taxes for the rich.

Last year Obama whipped big banks into line with his no- bank- is- too-big-to-fail juggernaut. Big investment banks quacked in their boots. They offered to cut their remuneration to income ratios (RI) from 50% — 40%, a move calculated to appease the Obama administration to loosen the regulatory screws. An ideal RI for banks is 25%.

Republicans are heavily funded by big business interests and thus expect the Republican Party to deliver electoral victory dividends. Republicans are ardent believers of free markets and thus are generally averse to caps on executive pay. Very influential economists are saying free markets crashed to death with the financial crisis.

That punches big holes in the Republican ideology.

Gono and Mushayavanhu
Putting caps on executive pay is a diplomatic way of asking executives to give up lavish lifestyles.  Huge sums of money are needed to sustain their lifestyle choices. Money determines the executive’s position on the social pecking order or social food chain. John Mushayavanhu, the chief executive of FBC Bank dismissed Zibawu leaders’ call for a strike, suggesting that the leaders’ motivation was to push for increases that would make them return to the lifestyles they enjoyed before the massive bank retrenchments.

Ironically, Mushayanhu’s sociological thesis is exactly Zibawu’s counter-accusation. A case of the kettle calling the pot black? Gideon Gono, the RBZ chief, last year, graphically accused bankers of awarding themselves “utopian salaries” and “living like angels”. Such utterances give the impression that executive pay in Zimbabwe is driven by sociology and psychology.

In short, the issue of executive pay is not a linear proposition.

Patel and Cameron coming to Zimbabwe?

Share your views on this matter at brettchulu@consultant.com.

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