Friday, April 27, 2012

Excessive executive compensation hurts competitiveness

When it comes to making the economy more competitive, the PAP govt always focuses on workers becoming more productive - be better, cheaper and faster. They never ever bring up making rentals, govt fees, utilities and transport cheaper. What about making housing cheaper so that our workers are better able to compete? The burden of Singapore's competitiveness seems to always rest on the shoulders of workers especially the lower paid workers.

The article below discusses how the bonus culture among top executives can ruin an economy according to a report by the British govt.

"The New Few: Or a Very British
Oligarchy," looks at how power and wealth in the UK has been concentrating in
the hands of a small elite while the rest of the country struggles
." - from article below.


UK is a much more equal society than ours if you look at the income distribution - power and wealth here is so much more concentrated and we have a more deeply entrenched power-elite without a fully democratic system.

We can be more competitive as a country if we eliminate excessive compensation among top executives and properly structure our wages so that those at the lower echelons are properly rewarded and motivated for their work.

"According to Smithers, the change
in corporate behavior due to the bonus culture has been "a major case of
increasing disparity of incomes in the UK and US" which have seen "a large rise
in the incomes of the highly paid at the expense of the rest."

"Indeed, a bias to focus only on the external market in recent years has helped push executive compensation way out of whack. Because of the yawning gap between the leaders and the led, employee morale is suffering, talented performers' loyalty is evaporating, and  strategy and execution is suffering at American companies.

Employees really do care about this issue, and a smaller gap makes for greater solidarity, and as a result better performance, throughout the workplace."[Link]

The British govt is taking measures  to restructure bonuses and wages to narrow the wage gap to make companies more competitive. Here, our leaders insists that productivity of  lower paid workers who are already underpaid have to go up before their wages move up. Our leaders also insist on linking their pay to that of top earners and this link makes it unlikely for our leaders to make Singapore more competitive through a proper and fair wage structure.
-------------------------

Published: Friday,
27 Apr 2012 | 6:55 AM ET

By: Antonia Oprita
Deputy News Editor,
CNBC.com
Friday is a busy day for UK
executives—dubbed "oligarchs" by some critics—as the bonuses they get and their
effects on the wider economy come once again into the limelight.
On one hand, Barclays shareholders hold their annual meeting, and there are reports that
some of them may protest against pay
deals
awarded to Chief Executive Officer Bob Diamond.

<>



Barclays chairman Marcus Agius
apologized to shareholders at the meeting for badly communicating the bank's
policy on pay.

"There is a significant minority
of shareholders who feel that we got some of these judgments (on remuneration)
wrong for 2011 and that we have not sufficiently taken their views on board,"
Agius said according to Reuters.

On the other, the deadline for the
business community to submit opinions on proposals by the UK government to make
executive pay more fair expires on Friday.

That consultation process was
launched in mid-March and tries to address growing public unhappiness at the
fast growth in executive pay, with many critics saying it is not always linked
to performance and some even warning that it will harm companies' and countries'
long-term prospects.

The UK government's Department for
Business (BIS) said in a paper on executive remuneration that the median total
remuneration of FTSE100 CEOs rose from an average of 1
million pounds ($1.6 million) to 4.2 million pounds ($6.7 million) in the period
between 2008 and 2010.

"This is more than a four-fold
increase; significantly greater than the increase in the FTSE100 index, retail
prices or average pay over the same period. This comes at a time where growth is
strained across the rest of the economy," the BIS said.

Also this week, a new book about
the bonus culture in the UK hit the shelves. Written by famous novelist and
Conservative party member Ferdinand Mount, "The New Few: Or a Very British
Oligarchy," looks at how power and wealth in the UK has been concentrating in
the hands of a small elite while the rest of the country struggles.
In an editorial in daily newspaper
"Evening Standard," Mount wrote that, for 30 years after WW II, the UK had
become a more equal and open society but now "it is painfully obvious that
social mobility has slowed again and a new super-class is soaring out of
sight."

"Without knowing why or how, we
seem to have hatched our own oligarchs, and we stand aghast and bewildered at
this flock of monstrous cuckoos," Mount wrote.

Change in Corporate
Behavior

He commended the UK government's
initiative to give more control to shareholders over what bonuses are awarded,
but one analyst said the changes in policy must go much further to reverse a
harmful shift in the way companies operate.

The rise in the bonus culture,
especially in the U.S. and the UK, has led to a "marked change in corporate
behavior" that may, over the longer term, put those companies at a disadvantage
compared with peers in other countries, economist Andrew Smithers wrote in a
report headlined, "The Change in Corporate Behavior."

Not just the private sector is
likely to suffer, Smithers argues. Bonuses awarded for short-term results rather
than long-term business development measures are likely to force governments to
keep spending in order to boost their economies, as companies refrain from
making investment in order to deliver short-term returns for shareholders,
rather than investing it for long-term gain, Smithers says.

He explains that business
investment has been on a declining trend in the UK and the U.S., while profit
margins have been rising, meaning that there is a savings surplus in the
business sector that cannot be explained by the economic downturn alone.
Because the calculations behind
bonus payments depend on short-term results, there is resistance to cuts in
profit margins and to increasing investment, Smithers wrote.

"If no public pressure is exerted
to change bonus systems, large fiscal deficits will need to continue if
recession is to be avoided, at least until there is another change in corporate
culture," he said.

According to Smithers, the change
in corporate behavior due to the bonus culture has been "a major case of
increasing disparity of incomes in the UK and US" which have seen "a large rise
in the incomes of the highly paid at the expense of the rest."

Government policy should tackle
bonuses as the cause of the savings surplus in the business sector and should
set increases in output and investment among the requirements that would need to
be met for bonuses to be paid, he wrote.

UK Government's
Proposals

The UK government's proposals
advocate an annual binding vote from shareholders on future remuneration policy,
increasing the votes required on future remuneration policy, an annual advisory
vote on how remuneration policy was implemented in the previous year, and a
binding vote on exit payments over one year's base salary.

In its consultation paper, the BIS
said that those measures would give shareholders more leverage on executive pay
and would promote "a stronger, clearer link between pay and performance in order
to prevent rewards for mediocrity or failure, while still allowing for
exceptional performance to be rewarded."

Representatives of businesses have
hit back at the proposals, saying that they would put UK companies at a
disadvantage.

The Confederation of British
Industry (CBI), representing around 240,000 businesses employing around a third
of the private sector workforce, warned in a press release against what it said
was "blurring shareholder and management responsibilities on pay."

The CBI also said that claims that
there was no link between executive reward and company performance under the
current system of awards were "misleading."

The Institute of Directors—an
organization with around 38,000 members in the UK and abroad, comprising
directors from various businesses—said it was concerned about the level of
executive pay at "some of the largest UK listed companies."

"Out of control remuneration at
some FTSE companies is damaging the reputation of British business as a whole.
Giving shareholders a binding vote will help to rein in the excesses, and
restore faith among investors and the wider public," Simon Walker, director
general of the Institute of Directors, said in a statement.

However, Walker added that any new
rules should be "properly designed" and that raising the number of votes on
executive compensation beyond a simple majority is "flawed."

© 2012 CNBC.com

24 comments:

Anonymous said...

Yes, you are right! It is about time that the government start to reduce all govt related costs that squeeze the population and high time that they stop maximizing profits in govt linked companies that provide essential services.

The high bonus culture also rewards a high risk taking culture. Take DBS as an example. They just reported outstanding profits for the first quarter. Look behind the the numbers and abt a third of the profits come from TRADING. Mind you - trading. Isn't this the kind of profits reported by Bear Stearns & Lehman just before they crash?
Now DBS wants to pay a huge sum to buy Danamon & have gone much bigger into China. Both are very risky places to do business. If something happens in Indonesia like the Asian financial crisis, can DBS take the hit or do we need to inject another POSB to keep it afloat.
One wonders how much the high bonus culture plays a part to incentive the CEO to go big on risky bets.

Anonymous said...

Taking risk is a no lose proposition.
Because the money used in making the bet does not belong to the CEO.

When the bet wins out, the CEO gets a big bonus.

When the bet fails, at worst, the CEO lose his job.
CEO does not have to pay back all his previous salary.

allthatjazz said...

anon at 12.55am, you forgot to mention that when a CEO who fails loses his job, he gets a ginormous exit payment. so he gets paid royally for failing. WTH!

what many companies seem to to forget is that a company's success is a result of teamwork. there are the planners, the risk takers, and the doers and others who support and realise the decisions of all the high-flying fellows, who would not be able to operate without that support!!

cleaners are regarded as such a lowly lot. what if they stopped work for 3 days? suddenly, as all the rubbish piles up, pple realise how essential they are.

maids are also seen as the bottom of the ladder. so ok, do without one then. look after your kids and your elderly and bedridden parents yourself. cook and clean yourself. do you feel the pain now?

hence, giving enormous bonuses and very high pay to frontmen and depressing the wages of the backend does not make sense.

just as attributing the success of this country to just one man is absurd. kuan yew would not have been able to take this place anywhere without goh keng swee, eddie barker, rajaratnam, Mr HDB, toh chin chye and the rest of that gang. at the end, kuan yew was just a good salesman.

rewarding only the top echelon also results in a lot of envy and unhappiness, a loss of dignity and self-worth. pple get fed up with the lack of appreciation and recognition. they do less. they dont perform. and why should they.

you have essentially the situation we are experiencing now, and the unhappiness that is coursing through so many sporeans.

the cutting of costs is one Major avenue that can make life manageable for those who earn less. it is also one of those routes which are completely beyond this govt, which is totally driven by only profits and making money. imagine, gas prices for the home are going up with everything else, when world gas prices are at a low. why?

besides paying people of all levels fairly, there is an urgent need to also restore people's pride in what they do, particularly in the jobs which are essential and not well paid. these include nurses, social workers, kindergarten teachers, and yes, cleaners. at the end, no country can function without them. it can however function without a govt, as belgium has shown.

Anonymous said...

"When it comes to making the economy more competitive, the PAP govt always says workers have to become more productive - be better, cheaper and faster. They never ever bring up making rentals, govt fees, utilities and transport cheaper."
Lucky Tan

But many workers still want to vote for PAP what! And which enabled PAP to win 93% seats with only 60% votes!

Lucky Tan, if you were the PAP, wouldn't you want to do the same like PAP too?

Or put it more simply, if you were the boss, if your workers don't mind low pay and lots of hard hard work, do you mind?

Anonymous said...

Ay sai gia zhoi zhoi, gia lah.

If can take a lot, take lah.

If can eat, eat lah.

If can whack, whack lah.

If can XXXX, XXXX lah.

Tio bo? Right or not?

Anonymous said...

Everything you want also can lah, but just don't kena caught and kena punished. Like what happened to the school principal.

Or don't kena exposed, sacked or voted out.

Anonymous said...

"Ay sai gia zhoi zhoi, gia lah.
If can take a lot, take lah.
If can eat, eat lah."

Spoken like an MIW.
Farking sociopath.

Definition of sociopath:
http://www.ehow.com/about_5067762_definition-sociopath.html

Anonymous said...

"Spoken like an MIW."
Anon 28/4/12 09:25

Not really lah. Anon 28/4/12 03:25 is just saying it as it is. More like the good Lucky Tan than MIW. He just cover the areas which Lucky Tan hasn't say yet.

Do you think the MIW always say it as it is? Or say "what they think" it is?

Anonymous said...

"Or don't kena exposed, sacked or voted out."
Anon 28/4/12 08:46

But how, like not being voted out? Not so simple, right?

Anonymous said...

"But how, like not being voted out? Not so simple, right?"
Anon 28/4/12 10:05

Of course not simple lah. In fact very difficult and complex.

Don't believe, just ask the 93% of opposition candidates in GE 2011.

Or one of the opposition candidates who won in GE 2011.

Anonymous said...

In fact it is also very difficult and complex to fix a date for a by-election.

Don't believe, just ask PM Lee.

An honest man.... said...

Deep down in all or hearts, we too yearn for the parachute and big bonus.

And why not?

We are not hypocrites?

We are genuine?

Bet my 13 month bonus each of us here will grab the parachute.

All values, integrity out the window...

The true human trait will be exposed.

Anonymous said...

Cheap labour = higher CEO compensation = higher ministerial pay. Period.

Very low interest rate policy = transfer of wealth away from households (screwed again) to banks & corporations = negative savings due to high inflation. Just read today's newspaper forum page. 2 directors, no less, from Miti/Mas: "As the majority of resident households here own their homes, they do not actually incur rental expenditure. Likewise, the sharply higher COE premiums for the first 3 months of this year affected around 8,000 new-car buyers, or a small proportion of resident households." si mi sai kong eh chuk! In fact, one of their honorable ministers effectively said the same thing a few months ago. If you no buy now, high inflation no problem. Wonder who's parroting who in this groupthink.

Anonymous said...

"But many workers still want to vote for PAP what! And which enabled PAP to win 93% seats with only 60% votes!

Lucky Tan, if you were the PAP, wouldn't you want to do the same like PAP too?

Or put it more simply, if you were the boss, if your workers don't mind low pay and lots of hard hard work, do you mind?"
---
There are two types of bosses for you.

1) good boss
2) PAP as boss

No. 2 fits your description.

Anonymous said...

Deputy Prime Minister Teo Chee Hean spoke at the National Community Engagement Programme (CEP) Dialogue today and called on Singaporeans to welcome diversity.

Instead of asking us to welcome immigration, I seriously think he should show us how to welcome diversity.

I will be convinced that he is for diversity only if the entire PAP cabinet step down and be replaced by yellow, green, gold, brown, pink, black and blue skin aliens.

Anonymous said...

"Deputy Prime Minister Teo Chee Hean spoke at the National Community Engagement Programme (CEP) Dialogue today and called on Singaporeans to welcome diversity."
Anon 28/4/12 18:13

He has a 60% mandate and 93% seats in Parliament to call on Singaporeans to welcome diversity.

But the mandate does not need him to show us how to welcome, or to convince you he is for diversity.

Anonymous said...

My door will always remain closed to any PAP visitor.

If any PAP person should be experiencing problems including threat to life or limb, I will not assist.

With policies that they have, they do not need any help at all.
If possible they could all live on pulau ubin in complete isolation.

Anonymous said...

"But the mandate does not need him to show us how to welcome, or to convince you he is for diversity."
---
If he is not going to show citizens how, then citizens won't know how. And if citizens don't know how, they will just have to do what they think is best for them. Agree?

Anonymous said...

Ben could have said one of the following or all of the following:

1) Your jobs are definitely in jeopardy.
2) Your aged parents whom you have been supporting may have to clean tables at Food Centres.
3) Your wife or daughter may have to moonlight as prostitutes.
4) Your kids can kiss goodbye to uni education.

Anonymous said...

"Taking risk is a no lose proposition.
Because the money used in making the bet does not belong to the CEO."

Privatisation of profit & socialisation of cost.

Anonymous said...

When Teo Chee Hean exhorted "Singaporeans to welcome diversity", it is doublespeak for welcoming more "diverse" immigrants. In other words, we need more people on this red dot.

Anyway, coming back to excessive compensation for executives, we should have a law to cap executive compensations and bonuses linked to corporate taxes which is now 17%, which is very low. There should be a budget for the total senior executive compensation of a company based on it's turnover. Any amount exceeding this is liable to an additional corporate tax of the same amount or more. This works in many of the sports organisations in the USA eg the NBA salary cap.

So if a company wants to increase the bonus or pay of, say, it's CEO, it must pay more in corporate tax. Come to think of it, we should already increase the top rate income and corporate tax now.

Anonymous said...

1. Peg ministerial pay to top 500th (median of 1,000) earner’s pay.
2. Pay GLCs top executives exorbitant salaries and huge bonuses.
3. Demand the middle and lower level employees to be better, cheaper and faster by bringing in large number of foreigners to compete with the local or even replace them.
4. Blame the problem (the huge income gap) on the effect of globalization.

Anonymous said...

"When it comes to making the economy more competitive, the PAP govt always focuses on workers have becoming more productive - be better, cheaper and faster. They never ever bring up making rentals, govt fees, utilities and transport cheaper. What about making housing cheaper so that our workers are better able to compete? The burden of Singapore's competitiveness seems to always rest on the shoulders of workers especially the lower paid workers. "

You are right Lucky. Whats the point of becoming cheaper better faster when things like housing and transport becomes costlier worse and slower

Anonymous said...

"There is no reason yet to believe anything sinister is going on....Over the years, there were reports of GIC investing in real estate, commercial properties around the world and those have to be revalued. Its not a mess as Christopher Baling alarmingly claimed but a lack of information. "

I do not agree to this. It is also self-conflicting. If nothing will cause alarm bells ringing, why the secrecy that even President Ong couldn't know how much we have? Revaluing does not take decades to do which was what President Ong was advised would take.

We are all stakeholders on this matter. For a long time many of us speculated that our government has been losing and squirreling away people's money or even worse, running a ponzi scheme and as CPF is compulsory we can't stop this. Finally someone has done the number crunching to tell us what we have all along been suspecting.

The government has chosen to remain non-transparent and this only serves to fuel speculation. The policies and outrageous statements made by our ministers have shown that they are a bunch of self-serving incompetent baboons who will do anything to keep themselves in power. More of us have finally been able to see through their wayang.

I bet that among the 40% many of us are hardcore anti-PAP. Misplaced trust is an understatement. Trusting that there's undeclared reserves by this government is to believe that we're living like the Swiss now as promised and all the problems we have now is just a mirage when the non-existence of undeclared reserves may not be far from the truth.