The Sunday Mail
Chris Chenga Open Economy
One of the brighter developments for us as an economy this year has been the inquisition on executive remunerations. The discussion was triggered by what was later coined “Salarygate”. Whilst controversy often helps to shine the spotlight on relevant issues, the best solutions going forward are derived from impartial and constructive analysis.
In attending to executive remunerations then, it would be unwise to elevate a consciousness of the public’s outrage against Salarygate.
Doing so leads us towards trying to determine compensation structures based on efforts to appease society’s emotions of disdain and its unforgiving quest for retribution.
Admittedly, demands for social justice must be served in regards to how salaries are designed. However, impartial and constructive analysis would notice that there is a way to go in finding pragmatic formulae for designing compensation structures to this end. I would argue that the reason why most economies are struggling to design sustainable compensation structures is because of a hasty emphasis to satisfy public perceptions.
Evidently, this has been a futile approach. The last global recession was caused by the incentives for high compensations within the financial institutions of developed economies. For almost a decade now, policy-makers, academics, activists, and the general citizenry have frantically demanded immediate adjustments.
Regrettably, a pragmatic solution is yet to be found because all these stakeholders have omitted the question: How does an economy go about quantifying social justice in monetary form? So as activists create movements like Occupy Wall Street or policy-makers denounce high compensations, all this exertion is only effective in appeasing public perceptions.
Stakeholders do not actually get what they really want for they have offered no pragmatic formula to serve the social justice they seek.
For instance, suppose a bank executive’s compensation of US$300,000 annually is perceived to lack social justice, how much lower must it get and on which formula would we derive that decision?
These are really vague demands!
As I mentioned before, in Zimbabwe, our economic challenges since dollarisation can largely be attributed to astronomical remunerations for executives. Encouragingly, both public and private governance have recently taken steps to amend compensation structures. Commendable as these efforts may be, inconsistency and confusion due to vague frameworks are still very evident for all to see.
A few weeks back, council bosses who ignored Government’s directive made long ago to cut their salaries to US$9,000 a month were asked to pay back excess compensation. Some are still receiving US$27,000 a month. Just recently, suspended Harare Town Clerk Tendai Mahachi handed in demands for a US$3 million-plus exit package. This should not be odd as high level executives in local government are still getting paid such overwhelming salaries.
It is credible suspicion that like many others worldwide, our efforts have been motivated by attending to public’s dismay over high remunerations — little formulaic guidelines invested into finding suitable compensation structures. As I have conceded, ambiguity with regards to social justice of compensation is a difficult challenge. Thus, I suggest an effective means of constructing a formulaic framework on which to design compensation structures would be to identify reasonable metrics.
This would be a logical step towards quantifying the social justice component of what we expect individuals in different occupations to be paid.
I will offer two examples. Firstly, we must interrogate the social meaning of “performance”. Most compensation structures are matched against scales of achievement. These scales of achievement tend not to be subjected to adequate query on whether they bring about social justice.
For instance, councillors and town clerks are meant to ensure sound administrative governance. That should be the scale of achievement.
Do we have benchmarks for these duties, whether qualitative or quantitative, on which we can place monetary value that councillors or town clerks can be paid? In the more corporate sense of social justice, one can argue that performance takes on different expectations from different shareholding interests.
In certain State enterprises, performance should be scaled on public service provision. Likewise, do we have benchmarks for these expectations, whether qualitative or quantitative, on which we can place a monetary value? Public corporations like the Infrastructure Development Bank of Zimbabwe or sectoral banks like Agribank would be expected to bring about social desirables beyond the common financial achievement of traditional corporations.
How then do we put monetary value on these social desirables? Second, we can match compensation to macro-economic desirables. For instance, an issue that is yet to find credence in Zimbabwe is that of compensation inequality. While executives are paid US$27,000 a month, the average salary in our country is around US$400. For argument’s sake, say the US$27,000 is justifiable through other common compensation metrics such as market rate, educational qualifications or work hours.
Is there adequate social justice in that salary when it is causing macro-economic depression? As most monetary returns are being given to a few individuals, overall demand in the economy is falling, causing economic strife for the majority. The fact is high income households have a greater propensity to save than low income households.
What is happening in Zimbabwe is that monetary returns are focused amongst a few who then naturally save, or spend less. The majority have little to spend, too, because of meagre salaries. So, overall spending is not enough! Thus, we should start to ask: At what point does remuneration create harmful inequality?
In that perspective, unlike an accumulative effect in terms of performance, social justice finds a deductive effect on remunerations. These are just a few considerations which may construct reasonable frameworks to how we design more sustainable compensation structures. Most importantly, they are not responsive to public discontent towards high remunerations.
Instead, they are impartial and constructive approaches which help guide pragmatic design towards the social justice we want.
