The media loves to remind us of our station in life by always referring to a Mukesh Ambani or an Azim Premji with a prefix indicating their rank in the wealth list. I’m sure neither of these individuals seeks that kind of constant publicity, but reporters probably do it to motivate us laggards to quickly climb that ladder. The many who don’t make it are probably driven to the analyst’s couch. Studies suggest that social inequality has its effects on health, relationships and other civic issues.

Economist Thomas Piketty says that the reasons for inequality are not purely economic and we must seek them in political decisions related to taxation and finance. That explanation fits in nicely with the current political climate in the US where the president has slashed tax rates for the rich since he believes that they will now be motivated to invest and create more jobs. Piketty also argues that when economic growth is slow and the return on capital is high, it leads to long-term trends in accumulation of wealth, further widening the gap.

Power play

Another of his observations relevant to us is about the characteristics of top earners. He notes that heads of companies not only have it in their power to pay themselves more, but also that this is unrelated to their productivity.

The US has required for some time that companies disclose the pay of their directors and how this is arrived at. But that transparency has not helped to embarrass them since it is easy to retain a compensation consultant who will find the right theory and peer group to justify everything.

Now, under the Dodd-Frank law, US companies are required to report in their annual statements how their CEO pay compares to that of their median employee’s pay. One firm, Equilar Inc, analysed data pertaining to about 350 firms. Interestingly, while the multiple is only about 100 times in the energy sector which has to employ several highly qualified people given the nature of their business, in the food and beverage sector it is over 230 times. In retailing the multiple is about 670 times.

Banks surprisingly paid their CEOs less than 100 times the median employee. This is probably because banks had held back total compensation for a while as the public was smarting from banks’ misadventures that caused the 2008 financial crisis. Now, they have blossomed again and average compensation in 2017 was reported to be at about $25 million (about ₹158 crore), 17 per cent over the previous year.

Brianko Milovic, another scholar who studies inequality in income distribution, found that in the period 1988-2008, although the middle classes gained 2-4 per cent of the increase in incomes, the top 5 per cent increased their share of the gains by a disproportionately large 44 per cent. Clearly, transparency and merely making information available does not lead to any reversal in inequality trends.

A recent effort is to see if a ‘just’ ranking system will help influence the corporate world. JUST Capital is a non-profit that believes in ranking companies based on whether they operate in a just manner. In a recent poll, 84 per cent of the workers said just companies should pay their workers a fair wage. Are you surprised?

The writer is a professor at Suffolk University, Boston

Related Topics
comment COMMENT NOW