Thursday, April 22, 2010

The big question of remuneration

Dear Colleagues

There is outrage in the Main Street of the United States and in the real ... that is non-financial services sector ... of the global economy, about the very high remuneration being handed out to the stars of the financial organizations.

A forum featuring national experts on corporate compensation is convening in Washington early in May to discuss "Executive Compensation: what should we do?". It is being organized by the Economic Policy Institute and the Center for the Study of Poverty and Inequality at Stanford University

The organizers introduce the issue as follows:
Executive compensation has risen enormously since the 1970s, as has the body of research investigating the reasons for its sharp ascent. But only now in the midst of the "Great Recession" has this rise in compensation come to be widely seen as problematic. Has the rise in executive compensation come at the expense of rising living standards for lower wage workers? And if so, what role should public policy play in reforming the system?

... SNIP SNIP ...

The event is a debate of what forces lie behind skyrocketing executive pay, as well as what, if anything, policy makers should do to turn things around. After the presentations, speakers will take questions from the audience.
I have to say, I take issue with the idea that it is only in the midst of this "great recession" that the matter had become problematic. It may be true that it is only in this circumstance that the media has seen fit to talk about it ... but it is inherently a very bad situation that is not in the interest of society at all ... and has been growing in importance for decades!

No question in my mind that people should be adeguately remunerated ... indeed well remunerated. However, this is a complex matter, and in need of massive reworking!

The differential in remuneration between Main Street and the stars of Wall Street is a structural flaw in how society works that is in need of correction. The forum will address the question "What should we do?". I am not optimistic that anything substantial will emerge from the dialog in large part because the issue is being addressed without looking at the broader context of remuneration in other places and at other times.

Having done assignments in more than 50 economies, I have come to the view that the differential in remuneration between different places is a great structural flaw in our global society ... yet studiously ignored by the practitioners of development and, it seems, the academic community. Most "experts" in development who work as consultants or are employed by institutions like the United Nations or the World Bank are paid very well. They advise on policy issues and initiatives to help people in the lowest tier of the global remuneration pyramid and it seems that they are are not anxious to raise the remuneration question. It would ruin a lot of career and retirement plans!

Remuneration is at the heart of nearly every major argument in society.

The health care debate in the USA is at its core about how much money is going to be available to pay big money to the decision makers or stars of the medical sector ... after paying as little remuneration as possible to other staff in the sector ... and not bankrupting society in the process!

From the perspective of Community Analytics (CA), the problem of remuneration needs to be put in a framework that is both dynamic and comprehensive. CA argues that there has to be a change in the way the game is scored, so that there can be a change in the way the game is played.

CA is all about metrics. At the moment the only measures that are used in the allocation of resources and the "cheer leading" of the business media is "money profit". The measurement of money profit is ubiquitous and a whole sub-structure of analysis has developed around the drivers that result in producing money profit. In this money profit ecosystem, it is possible to argue that the stars of finance should be remunerated well, just as one can argue that stars in sports or entertainment should be remunerated well. But the existing money profit metrics system is fatally flawed because it totally ignores the value impact of economic activities.

CA adds a second framework of metrics to bring in the value dimensions. CA addresses the question of whether the economic activity produce social value adding or does the activity end up neutral or causing value destruction. People who are engaged in activities that are value adding deserve good remuneration ... whether or not the activity is a "profitable" activity or not. Activities that are value neutral or value destroying might as well not exist!

A framework of metrics that has profit and value will end up giving a fundamentally different profile for remuneration than the one that now exists ... it changes the profile of remuneration in poor communities and it changes the profile of remuneration in much of the rich community.

Changing metrics is not "anti-market economics" ... in fact it is pro-market. However, CA brings better information to the market and releases the market from the straitjacket of just profit metrics. Opposition to better information will be huge because what exists at the moment is a market system that is "rigged" in favor on profitable money manipulation at the expense of activity in the real economy where results include good outcomes for society as well as more modest profit.

Money profit optimization without taking into consideration the value for society is bound to cause a mis-allocation of resources. I don't think anyone has added up the cost to society of the dumb way bankers have allocated so much money to making profit that had, at best, no social value adding, and as it turned out, huge risk for society.

The question of remuneration gets at the heart of whether or not there is going to be structural unemployment in the United States, Europe and other places or not. The issue of remuneration is central to the subject of immigration. Abject poverty is largely a result of remuneration profiles that are wrong ... and solutions that have not worked. Remuneration is a very important issue ... huge ... and not very much on the radar other than for the headliner about banker remuneration.

I do not expect to be at the forum ... though it might be interesting!

Peter Burgess

PS These are the people who will participate:
Christopher Wimer,
Associate Director, Collaboration for Poverty Research, Stanford Center for the Study of Poverty and Inequality
Lawrence Mishel,
President, Economic Policy Institute
Robert Frank,
Henrietta Johnson Louis Professor of Management and Professor of Economics, Cornell University
Jesse Fried,
Professor of Law, Harvard Law School
Alex Edmans,
Assistant Professor of Finance, The Wharton School, University of Pennsylvania

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