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Measured by Money Alone.. - Views on News from Equitymaster
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  • Oct 1, 1997

    Measured by Money Alone..

    Capitalism is a strange animal. Our textbooks tell us that it is supposed to reward those who have a skill and wish to encash it, and punish those who don't have a skill or choose not to exploit it. This reward and punishment relationship is taken care of through the mechanism of the "invisible hand". What the textbooks fail to tell us is that somewhere along the line, your "invisible hand" begins to clash with the interests of my "invisible hand" and ultimately the stronger "invisible hand" wins. That is the law of the jungle. That is the law of capitalism much of the world has adopted.

    Somewhere along the line the meaning of money has changed from a medium of exchange to a measurement of power and respect. From being a means to an end it has become the end itself. From being a medium of exchange, money is now the message. How one gets it, has it, or multiplies it matters less than how much money one has. And many times, the distribution of wealth (as measured by money) is probably far in excess of the actual contribution made by a person.

    A little aside on the fairness of distribution of wealth. A visit to a site manned by a labour union in the United States site on the internet tells you that in 1996 Michael Eisner, CEO of Walt Disney Company, had a total compensation of US$ 204 million and has another US$ 303 million worth of exercisable options. The AFLCIO, a union of US workers, works out that Eisner's compensation in 1996 was 1,021 times that of President Bill Clinton and 8,269 times that of an average worker in the US. Data for Fed Chairman Alan Greenspan was not given but, assuming his annual salary to be US$ 150,000 it suggests that Michael Eisner was making 1,361 times as much money as Alan Greenspan. The figures for the CEO of Coke are a little less startling as he made "only" 36 times the pay of President Clinton, "only" 293 times the wage of the average worker and has "only" US$ 113 million in exercisable stock options.

    I may have missed something there. Alan Greenspan and Bill Clinton are being hailed as the guys who gave the US economy the platform which resulted in this goldilocks economy of seemingly unending steady growth with no inflation. At a macro level the US stock markets have created wealth in excess of US$ 4 trillion (12 times India's GDP) over the past 4 years, yet, Greenspan and Clinton don't seem to have been compensated barring allegations of some dubious donations made to political parties. Neither has there been any substantial reward given to the workers in the companies that made it all happen. AFLCIO data suggests that in the 15 year period between 1980-1995, CEO pay was up 500%, company profits up 145%, inflation gained 85%, and factory wages gained 70% - less than the inflation rate! Not only is the pay scale of a CEO in USA rising but so is the discrepancy between CEO pay and average workers compensation from 44 times in 1965 to 212 times in 1996. Common sense suggests that everyone probably contributed to the well being of the US economy, yet the fashion of stock options indicates that some people walked away with a lot more.

    In India, data on a sample of 200 companies (The Quantum Stock Market Yearbook), shows that in FY94 wages and salaries were 44% of the profits before taxes and employees costs. By FY96, the share of labour (managers and factory workers) had declined to 36%. Although, Quantum does not compile any numbers to see the share amongst the managerial class and the factory workers, my gut feel is that factory workers have probably lost out.

    There are probably a couple of messages in all of this the most obvious one being to make sure that your children are groomed to be CEO's before the pendulum swings in favour of the working class! I guess the days of rewarding hard work are over and the days of rewarding hard thinking and strategising are in. In the last thirty years, not only has the nature of the work changed from "body" strength to "brain" power, but a fewer percentage of the population controls a larger chunk of the world's wealth.

    Capitalism is a great energiser and I support the move that India is taking to energise its economy though I have my fair share of doubts because, at times, the people in control of our economic destiny do things that are fashionable as opposed to what is correct. Convertibility is fashionable, stock options are fashionable, and creating wealth (as opposed to worrying about its distribution) is fashionable.

    Sometimes, we surrender our common sense to keep in times with the fashion. After all these years of telling us that India had the best deal in power projects with a capital cost of Rs 4 crore per megawatt, we are now being told that there are people out there willing to do these projects for 50% of the cost negotiated by our team of experts!

    Our biggest strength and contribution to the world is in terms of manpower and yet, our government threw away an opportunity to capitalise on this by not linking the free movement of people with the free movement of goods and capital. We should have told the world that for every cut in our duty rates and for every FII application approved, the developed world would grant tens of thousands of working visas to our skilled professionals and software graduates. But, no, it was fashionable to liberalise and be invited by the World Bank and the IMF to their annual dog shows and be presented as the cutest poodle at the show. Our software companies and engineering consultants continue to beg for visas. Common sense was sacrificed at the altar of fashion.



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