»The Honest Truth by Ajit Dayal

Time to pay the MBAs less - and musicians more
18 MARCH 2013

In Switzerland, Thomas Minder - the owner of a herbal company which supplied toothpaste to Swiss Air - has led a small revolution.

Fed up with the pay to the "fat cats", Mr. Minder began a campaign in 2006 that led to a national referendum on pay scales to the CEOs, senior management of companies, and members of their Boards.

The question on the ballot of March 3, 2013 was: are CEOs and members of the Board (known to be friendly to the CEOs!) of companies like Nestle, UBS, and Credit Suisse paid too much?

The referendum had a turnout of 46.7% of the eligible 5.1 million Swiss voters.

And 67.9% of those who voted said, "yes, the CEOs get paid too much". This was the 3rd highest margin of acceptance of any referendum in the history of Switzerland. And this victory was despite en estimated USD 8 million spent by the business federations - and the government - to defeat this proposal. Even though the dogs were barking ferociously, the people refused to be swayed.

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Swiss info reported: For her part, Justice Minister Simonetta Sommaruga said voters had expressed their dissatisfaction with excessive corporate pay packages.

"Voters have given a signal to politicians to act and to the business community to show that it has understood the message," she told a news conference.

Sommaruga added her ministry would present an interim regulation within 12 months allowing parliament time to define the details of the necessary legislation.

It is only the 20th people's initiative - out of the 183 proposals that have come to a nationwide vote since 1891 - to win approval of Swiss voters.

In the near future they will also have the final say on proposals by centre-left parties and trade unions to cap manager salaries by a 1:12 ratio within a company, or to introduce a minimum salary at a nationwide level.

A few weeks before that the European Union voted that the bonus payment to any employee of a bank could not exceed 200% (2x) that of the base salary.

Minder's proposal got a huge boost when news broke on February 15 - 3 weeks before the ballot date - that Daniel Vasella, the outgoing CEO of pharmaceutical giant Novartis, would be paid USD 78 million not to work for a competitor for 6 years. Embarrassed by the leak - Mr Vasella said he would not take the pay-out. But the damage had been done.

Not that the sinful are kneeling down besides Pope Francis for redemption. On March 14 - 11 days after the referendum to limit pay, UBS announced that it was paying out USD 2.6 billion in bonuses to top employees for their performance in calendar year 2012. UBS happened to have lost USD 2.6 billion (what it paid as bonuses) that year. The bonus, by the way, was on average USD 6.5 million per senior executive. The incoming CEO of UBS was paid USD 26 million as a "golden handshake" package. That, too, will not be allowed in the future. But the godly fat cats feel there is some genius they have that must be rewarded - and they will continue to behave that way until it is illegal to do so.

Table 1: I'm a fat cat and you need to feed me!
Company, category of worker - what do they get paid?Average compensation, (Rs per annum)Factor of the base salary of a typical worker in 300 companies surveyed
Goldman, Sachs21,173,81812x
Assume that the Top 20% of workers at Goldman, get 80% of the pay outs84,695,30947x
Morgan Stanley14,510,1818x
Assume that the Top 20% of workers at Morgan Stanley, get 80% of the pay outs58,040,76332x
Average for 300 CEOs in USA683,700,000380x
Typical worker in the same 300 US companies1,799,0001
 And what do the ratios look like in India?   
Typical Senior Manager in Indian company, Equitymaster database, with assumptions4,896,50916x
Typical worker in Indian financial firm841,3693x
Typical worker in Indian company, Equitymaster database, with assumptions306,0321
Typical musician performing with www.NSPA.in360,000 

Many studies of shown that - on average - people working in the field of finance have seen a dramatic increase in their salaries and bonuses over the past 3 decades. Most other sectors have seen little or no growth over that same time period.

A world full of egoistic MBAs?

If someone were to plot a chart with the number of MBAs graduating in the world each year, the corporate scandals, and the amount of money paid to "top management", there would be a very strong correlation.

As a graduate of the MBA Program from Kenan-Flagler, the University of North Carolina at Chapel Hill, I believe that I learnt a lot about the principles of business. This has allowed me to contribute to the various companies I have worked in - including Quantum AMC.

But I know that I cannot take an excessive financial credit for what I have helped build. Many people have contributed to what has been built and - knowing that I have a limited life span - I would expect my share of future contribution to decline dramatically over time.

Most MBAs, though, don't feel that rewards need to be shared. In business schools, we are not taught humility. On the contrary, we are told that we are a special, select group of extremely smart individuals. The business schools will teach and equip us with tools that will allow us to have a tremendous impact on the companies we work for. We are brainwashed into believing that we are mini-gods ready to rule the world.

It is a rare business course - and an even rarer teacher - who will tell us to work for the benefit of society.

To prove the point, after the various financial scandals in 2008, the Dean of Harvard Business School suggested that Harvard needed to have a charter of ethics. Which makes you wonder: what exactly were they teaching those brilliant students at HBS all these years? How to cheat society?

The roster of financial geniuses who find new ways to mess up the lives of millions of people - and then have the lobbying power with governments to write themselves a bail out cheque using tax payer's money - are from many of these infamous business schools.

Companies should be built to benefit society - and to find ways to reward a larger number of people with a larger share of the total pie. And there is this view that the only value-add in life and to society is what can be measured in terms of some market cap or some GDP number. That is humbug: happiness is not measureable by money alone.

But this concept sounds alien - the world has been infested with the demi-god CEOs and their armies of swashbuckling MBAs. The media worships them when they should be shaming them.

Mr Thomas Minder in distant Switzerland has reminded us that governments - and institutional shareholders (presently part of the same racketeering "maximise my pay" exercise) - have a right and responsibility to bring some balance back in the reward structures.

The fat cats need to be slimmed down big time - it is time to bring out the surgeon's knife.

Correcting the imbalance - knowing the geniuses still want their outsized share!

Meanwhile, our own little effort to correct the imbalances has begun. The National Streets for the Performing Arts (www.NSPA.in) started an initiative to pay musicians a fixed fee for every hour of musical performance at public places. This began in October, 2012 with the initial involvement of 8 musicians. Today, over 20 musicians have signed up to perform. We have sparked off an estimated 400,000 smiles - and recognise there are millions of souls yet to stir.

A musician working with NSPA, on average, makes maybe Rs 360,000 per year for all their efforts to bring some joy to society and soul to its people.

Our stated objective: the world will be a lot better place when a musician - on average - earns more than a dead soul working for the financial crooks.

And - in case you believe that the financial firms have been reformed - this breaking headline from AsianInvestor: Goldman laments brain-drain in smart solutions: Stefan Bollinger, head of the firm's private investor product group and Asia corporate sales, believes there is too much focus on vanilla business at the expense of innovative ideas.

In September 2010, when the fury over bail outs of the fat cat financial firms was at its highest, the same Stefan Bollinger's plan was outlined in an article with the same publication as: The US firm outlines plans for building its solutions platform for private investors in Asia, focusing on simple, transparent and liquid products.

But that was then. The US and global governments and regulators are no longer seen as enemies of the financial firms. The Great Swindle has been forgotten. The sins of the past have been washed out. The pretence of simplicity is no longer required. It is time to go out and reach for your wallet!

You've heard it directly from those who do God's work, there was no Pope required to interpret this message: it is time to innovate and blow up the world - and keep collecting their oversized salaries.

Yes, NSPA and its ambition to ensure musicians and others from the Arts get rewarded more for their contribution to society has got a long way to go...but it's a start....

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Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt. Ltd and Quantum Asset Management Company Pvt. Ltd. The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The author, Equitymaster, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same. Please read the detailed Terms of Use of the web site. To write to Ajit, please click here.