Lets go back to 1800 USA. We could have argued that he is a good ‘slave-lord’ – he does not beat the slaves and does not sexually exploit the female slaves. Or to say ‘he is a bad slave lord he does not give the slaves enough to eat.
Actually the whole argument is flawed, because slavery is flawed. No, we have not really ended slavery, but corporate compensation is somewhat similar. A big finance company floats a mutual fund, life insurance, brokerage, financial distribution, home loan subsidiary,…et al. Why does this happen? Simply to create a big fiefdom for himself/ herself.
Expensive acquisitions, big mergers, big compensation. Some of the professionals connected with these activities are paid so high that you cannot believe it. One CEO has a resolution saying that the company will pay his rent for the rest of HIS life and his wife’s life. Simple. Another CEO wants a salary of Rs. 1 crore a month. Make no mistake both these people have a networth in 3 digit crores ATLEAST, and they are simple ’employees’ . No, not their father’s company like a Munjal or a Bajaj.
Shareholder democracy is a myth. So the shareholder says ‘go and do life insurance business’ . It takes 12 years to break even and about 15 years to make profit. Maybe the company will make no money. They need a bank to sell the products and look for new business. The way the bank employees, the life insurance emploees, the agents are compensated – nothing is visible to the shareholder. The shareholder / policy holder luckily do not have access to see what happens at such ‘educational get togethers in USA, South Africa, Dubai…..hopefully one day we will access the data.
The agency system by which a shareholder controlled the behavior of the Board and top executives. Take an example – as a shareholder holding 100 share of SBI (A PSU) how much can you control what sbi mutual fund, life insuance, sbi brokerage….) the small guy has no clue. The agency system is lost. So the people at the top – even do not have to stand before an AGM to ask for a higher pay. CEO wants a great pay and a great ESOP so he has to pay the CMO, CFO, CTO….JUST as well. The original shareholder of SBI does not even see that compensation. Or in life insurance companies making the wives agents and compensating them. This escapes scrutiny of the shareholder – remember it is hidden in commissions, not in salaries.
CEO pay – even in IT companies, banks, etc. is so high – 340 times the lowest paid person – sounds ridiculous in a democracy is it not? But it is here – and at a time when the productivity is going down. The argument that the CEO is increasing the market capitalization of the company seems to be so hollow, that it can be laughed at. I know one CEO who has 3 brokers on his speed dial and manipulates his company’s share on a REGULAR basis. Then there are banks like ICICI which have destroyed shareholder value EXACTLY at a time when Hdfc bank created wealth for its shareholders! However, with the listing of the insurance subsidiaries, mutual fund subsidiearies, brokerage ..suddenly you might find a huge market cap jump on a consolidated basis.
When the board of a mutual fund is voting on the salaries of the top management, who is voting? the directors who are answerable to NOBODY…sad, but true. Where will responsibility come from?
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