Friday, 27 November 2015

"Inequality - social evil or acceptable cost of free market capitalism?"

"Inequality – social evil or acceptable cost of free market capitalism?" was the title of a talk given recently at the University of Winchester Business School by the Director of The Equality Trust.

Their website states "UK income inequality is among the highest in the developed world and evidence shows that this is bad for almost everyone. The Equality Trust works to improve the quality of life in the UK by reducing economic inequality." so the talk clearly comes from a particular point of view.

It was really interesting to hear what he had to say and some of the conclusions arising from research in this area.  The presentation gave us some data without much definition and context but subsequently I have spent some time exploring their website  which I would commend to you as a source of summaries of findings and they provide plenty of links to research on the topic.  This page included an interesting contrast between income inequality and wealth inequality.   I knew from the talk that the UK was one of the most unequal countries on their list for income ( as measured by the Gini coefficient).  What surprised me in the data was how low we come in the ranking for wealth inequality.  Not only that but the most unequal country for wealth was the country that was shown in the talk as least unequal for income which was an interesting contrast.  I'll not spoil the surprise as to who it is...  Would be interesting to dig into this a bit more and understand what the boundaries are between "wealth" and "income" in this context.  Does, for example, the category of "income" include any returns that I receive from my "welath" - eg dividend payments if I had shares.

The other surprise to me from the talk was that the UK Gini coefficient actually declined a bit between 2010 and 2011.  With some bumps up and down in the intervening years we are tracking at the same level as it was in 1990,  all be it that this was sharply up over the preceding 2 decades. That's not to say it isn't a problem but my impression had been that we were in an era of rising inequality.

We saw how Income inequality and a general index of health and social problems seem to correlate - I did notice though that the data here for income inequality was actually not the same as the Gini coeficient data on the previous ranking chart so unsure exactly what this was measuring.  Need to dig into this a bit more to understand where this data is from - "The Spirit Level" now on the list of books I need to read someday.

Our speaker made a good point about use of language and how that influences our view.  Articles in business press for example will tend to refer to the high earners and their pay packages under heading of "talent management".  Discussions of lower earners will tend to be around "workforce costs" or "resource planning". Communicating a message of unequal valuing of the people perhaps.   The use of language to "guide" your audience is of course pervasive and often reflecting of the narrative that the writer is aligning with.   Looking at articles on CEO pay in the press there is usually some comment around the ratio of their pay to the median or lowest paid in the company.  Read about the income of a sportsman, and this language simply doesn't seem to be there.  To take just one example, I'm not sure I've ever seen a ranking of footballers' salaries that looked at how that compares as a multiple of the income for the lowest paid employee/worker at the club.

Discussion of inequality is often accompanied by a linked discussion of CEO pay and indeed this did come up during this talk.   What would happen I wondered if you looked at top FTSE 100 CEO salaries, which of itself has of course limited the view to leaders of public companies rather than privately held enterprises, and mixed in earnings from some other potentially high income groups.

To the extent that the reported incomes are actually reflective of reality ( sources noted at the end) here is what I found with a few minutes of web searching.

Top 3 FTSE 100 CEO earners

1 - £42.978m
2 - £19.51m
3 - £16.176m

Taking a look at top paid UK people on the "World's highest-paid Athletes" list that fall in this range we have

1 - £32.11m
2 - £25.93m
3 - £23.27m
4 - £17.88m

Adding in report of top paid actor

1 - £17m

So while a lot of  the heat and fury seems to be directed at the public company CEO pay, by the time we have worked our way down to third place we have already picked up 4 sportsmen and an actor. Our population of top earners is now only 37.5% CEO, and I'm sure there are other categories, such as the entire music industry, that I could have looked at to find other people that would come into this bracket.

I'm not saying here that there isn't an issue, what I'm wondering is why it is that the focus is so disproportionately on the minority of the top earners who happen to be FTSE 100 CEOs and the comparison of their salary as multiples of what others earn.   If the aim is to address inequality then why focus on this group?   I wonder perhaps if it is something to do with what skills we value as society?  Is it that we see a footballer/actor/singer/.... performing their art and we appreciate a skill in what they do but somehow we fail to recognise the skills and abilities of the CEO?

So, a really thought provoking evening and one which, as you will have noticed and perhaps unsurprisingly, leaves me with more questions than answers.

Sources of my data 

Huffington Post FTSE 100 Top Earners -

Forbes world's Highest paid athlete -   converting USD to UKP at current exchange rates on 27th Nov 2015 using search box.

Highest paid actor -

1 comment:

  1. I think the reason we focus so much on corporate pay Michael is the fact that so many people at the top of corporates are not the most skilled. This notion, which people often feel instinctively, was supported in a long article by Anderson and Brown on the functions and dysfunctions of hierarchy, which showed that those who are often highly skilled at leading and influencing people are not those who get to the top. It is those who are motivated by power who get to the top - something that McLelland pointed out many decades ago. No-one minds that Steve Jobs or Mark Zuckerberg get paid so much nor one of the richest men in the world, Bill Gates, because they earned their rewards and have contributed so much to society. It is the Tony Haywards (BP's I want my life back), the Fred Goodwins, the Paul Flowers of this world that earn our ire. And, we all know of those who reach the top through machination, greed, and in fact psychopathy - see the Daedalus trust website for incontrovertible evidence of this. In fact the according to the UK Government’s Department for Business Innovation and Skills, CEOs of FTSE100 companies received average increases of 13.6% per annum between 1999 and 2010. This compares with just 1.7% annual increase in the FTSE index during the same period. They conclude that the FTSE index appears ‘to have had no impact on the level of remuneration awarded’ (Department of Business Innovation and Skills, 2011, p. 11). People who get to the top of corporates are more likely to be psychopaths (there are more of these at the top of organisations than there are in the general population) and often use their positions to rob the till before they leave. They may also contribute to some of the great ills in our society - environmental disasters, bribery, corruption, exploitation, low levels of child wellbeing. In addition, the organisation if often left worse off by certain CEOs suffering from low morale and chronic underinvestment. This is why the Tony Haywards, the Martin Shkrelis and the many anonymous leaders of their ilk will never earn the same respect as the Andy Murrays.