(V) Curbing growing income inequality

Paul Sweeney: No public servant is worth more than £1,000 a year. So said De Valera in 1931 (He paid himself more - £1,500 in March 1932 - but this was a reduction of £1000 or 40%). No man is worth more than €200,000 so declared Brendan Howlin in 2011, as the Government tries to limit the pay of top public servants. Howlin’s move will a) help the public purse, b) help narrow a growing pay gap for the first time in decades, c), it should also have a major demonstration effect and d) its popularity may help in addressing the crisis in a radical way by actually changing the pay gap and thus improving social solidarity.

It has been seen that gross Irish incomes doubled over 20 years in the boom but are relatively stable now. For most at work, they are not falling and for some, in the export and other dynamic sectors, there are small wage rises of around two per cent. Yet Ireland is one of the more unequal societies in the developed world. Financial insecurity and precarious incomes are becoming more commonplace.
Yet it is in time of crisis that some of the most progressive moves have been made. Just after the war, Britain brought in the National Health Service, and Rab Butler, a conservative, radically reformed education in 1944, making secondary education free for all pupils. With vision and leadership, it is possible that this government could steer us out of this deep crisis in a way which makes Ireland the best place in the world in which to work, live and grow old.

It has been seen that the labour market is also becoming polarized between “cool jobs and crap jobs”. At the top, owners and top executives are paying themselves obscene and utterly undeserved sums, as shareholders are unable to govern them. They have rewritten the rules of corporate governance, of “shareholder capitalism”, in their favour and that is what makes government policy on top pay so important.

While we have had endless debate on “public sector reform”. there is no debate on private sector reform. The rot was in the boards of the private banks.

Even US corporate investor Carl Icahn is scathing of US corporate governance, saying “Many US companies are very poorly run and non-competitive because corporate governance in the US is, to a large extent, dysfunctional. Boards do not hold managements accountable, and corporate elections for the most part are travesties.” (Fortune 4 July,2011).

The fight back against reform of top pay has began with the utterances of Michael Somers, who called for the boss of the state-owned AIB to be paid more than half a million because, in his view, this paltry sum may not attract talent.

There is no shortage of talented executives who would gladly work for less than half a million. Further, it is clear that the more the bank executives were paid, the more reckless they became. They did not just destroy three big banks worth around €66bn, but also contributed to bankrupting this country. So any nonsense in favour of widening the pay gap should be dismissed.

The outrage in Ireland on executive pay and wealth accumulation will probably be temporary, as it has been in the UK and US, and even Germany. The ex-head of Germany’s Bundesbank, Axel Weber, was “rewarded” with SFr2m ($4.4m) ‘hello money’ when he became deputy chair at the UBS of Switzerland. It had been one of the first banks to fail in the financial meltdown. There is a long and growing list of “excessive rewards,” peer-endowed, by the supposed “masters of the universe” in the corporate world.

In my view, people should be paid a good salary to do their job. Bonuses should only be for exceptional performance. Most performance-related pay can be, and is, rigged by “peers”. Nobel economist Akerlof is highly skeptical of performance-related pay. It is just a way for those at the top to take more for themselves under the pretence of some kind of good performance. Unless these mega-rewards, which can so distort corporate performance, are stopped, the capitalist system will crash again.

Goldman Sachs (GS) has paid its employees $125bn during the past ten years, twice what it made in net profits. It is to pay them a further £8bn, or an average of £238,000 each. for 2011. That is a good illustration of how perverted the current capitalist system has become, and how far it has moved from its old risk-reward model.

The investors’ Lex column in the Financial Times, commenting on the GS results, said “The reality, however, is that banks also support a thick layer of second tier executives, as well as legions of pen-pushing, meeting-loving, middle- and back-office workers who are paid multiples of their worth and contribution, especially compared with other industries. And market dynamics matter. If the whole financial sector started paying less, the bargaining power would fall for even star employees.”

There is a wide debate about the capitalist system abroad, but little here. Here it is about “public sector reform”. Even the Financial Times is running a long series called “Capitalism in Crisis.”

Mr. Howlin has made a radical move on closing what was a growing gap in pay between those at the top of the public service and those below. What is now needed, to improve economic performance and its sustainability, is reform of private sector governance. The National Competiveness Council calls for such reform in governance in its Competitiveness Challenge, recently published.

Some of the reforms on governance which could be implemented to narrow the pay gap in the rest of the economy would include:
1. Cease all tax subsidies to companies who pay excessive amounts to high earners. For example, no pay of over, say, €200,000 can be offset against a company’s tax (the US has such a limit on offsetting high pay against corporate tax).
2. Curb excessive tax breaks for executive pensions.
3. Limit bonuses to between one-third and one half of salary, otherwise they cannot be offset against tax, and maybe also impose a tax surcharge on them.
4. Reform Irish company law to make it more transparent, by removing the option for all large companies to avoid disclosure by a) going unlimited or b) by merging Irish businesses into European consortia or c) any other means.
5. All public interest companies should have to disclose the full accounts of those individual subsidiaries which are deemed to be of interest to the public.
6. The Irish subsidiaries of European companies which are public interest companies should no longer be able to lump all their assets and sales into one big company.
7. Companies should no longer be allowed to operate in Ireland by profiting from activities here if they are registered in tax havens like Liechtenstein or the Bahamas, without also having an Irish registered base and disclosing all information in accordance with Irish law.
8. There should be a higher tax rate on very high incomes, when we recognise that there are many who “earn” over a million a year.
9. A systematic and vigorous pursuit of Irish tax exiles must begin, to ensure that they are tax compliant on residence
10. Reform company law on transparency of executive remuneration with tighter legislation for all large companies in Ireland. It should be similar to the SEC (the regulator) in the US, where there is a clear statement of annual remuneration for top executives. Thus there would be a single total figure for the year, with simple disclosure rules covering all top executive remuneration, including pensions, share options, chauffeured company cars, use of helicopters, aeroplanes and other benefits. This should apply to all senior positions in the public sector too and to published in the State Directory (which must be brought back and published electronically again - by Dept Public Expenditure and Reform).
11. Introduce a law to set broad parameters under which top executive pay is to be set by company boards in Ireland. This would include measurable objective criteria, including financial performance, employee welfare, consumer satisfaction, environmental protection, etc.
12. There must be the appointment of at least two or one- fifth of the board of real outsiders as non-executive directors of all major companies. These would be appointed by a government corporate appointments body and/or an investor grouping, and/or by a pension fund.
13. At least two worker representatives should be on every board. This is the rule in Germany and most Nordic countries. In the light of the excessive remuneration and poor performances of many of those at the top of the corporate world, stakeholder in companies need representation on the boards and who better than representatives of the company’s own employee? (e.g. Norwegian Airlines, the up and coming European low cost airline, has two employee reps on the seven person board.)

On the broader side,
1) we need to reform the private sector by change from the Anglo American model of company law which is purported to be dominated by the interests of shareholders. In reality shareholders are diffused and too often have little or no say in the governance of companies. The power is “captured by the top management”. That is what happened the banks. We are reforming bank regulation but not even discussing this core issue.
2) Trade unions must be facilitated – not blocked - by the state in building up as the progressive force they were in the past to shift the imbalance where power is tilted in favour of corporations / capital. .This can be done by changing the laws which have made it so much more difficult for workers to have the civil right to join trade unions. Monti 2, a forthcoming Directive on collective bargaining from the EU Commission, now in the grip of the right, will make is even more difficult for workers to have the civil right to join trade unions.
3) There is need for greater education on why progressive tax systems are a key to redistribution, fairness, sustainable economic demand and social progress.
4) Finally there is a need to return to Social Europe. It is being unwound by the current Commission, the Council of Ministers and Merkozy.

In conclusion, Brendan Howlin’s move to cap the remuneration of top public servants is an historic move, reversing what seemed to be an inexorably growing gap between the top and bottom. The collapse in all six Irish banks has meant there is less excessive pay in them, and the crisis has reined in the remuneration of developers and other business executives. But events in UK show that, as soon as they can, the current business elite cannot wait to get back to the remuneration trough.

There has been much talk and action on public sector reform. What is now required is reform of the private sector – of the corporate governance of private companies, of company law to radically reform their boardrooms and practices – whereby the wider stakeholders interest must become paramount. Such reform of the private sector could, if done effectively, bring an end to corporate greed, risk-taking and huge value destruction.

But private sector reform – the end of Irish Crony Capitalism - is not even on the government’s agenda.