Inside Out

It’s the outsize pay packet, stupid!

Hong Kong, the world’s freest economy for 23 years running, is also one of the 10 most unequal economies on earth

PUBLISHED : Sunday, 19 February, 2017, 12:43pm
UPDATED : Sunday, 19 February, 2017, 10:23pm

Bob Grove, CEO in North Asia for the communications group Edelman, does not mince words: “Trust is in crisis.”

Unveiling this year’s Trust Barometer, which measures the level of public trust across the world in government, the media, business and non-governmental organisations, Grove’s message could not be clearer: trust in all, except NGOs, has been declining for several years, and over the past year has slumped.

No wonder so many populist political leaders are having a field day. No wonder so many in the US have rebelled against political elites by throwing their lot in with the improbable President Trump. No wonder so many in the UK have lashed out by voting to pull out of the European Union.

In Edelman’s World of Distrust, 19 of the 28 economies surveyed had in them more people who distrusted their governments, the media and business than they trusted them.

In this world of distrust, Hong Kong shows a terribly demoralizing trend – down from a “neutral” state in 2013 when around 54 per cent of the community trusted its four “estates” to a deeply distrustful state today with just 44 per cent holding faith.

Trust in government in Hong Kong is at an all-time low – 40 per cent down from 55 per cent in 2012. Clearly whoever wins the Chief Executive election in March has a challenging life ahead.

Trust in the media has fared little better – down from 54 per cent to 42 per cent - as suspicion over mainland China’s influence rises.

But the business community fares worst of all – trusted by just 34 per cent of respondents – with CEO credibility “in crisis,” according to Grove. And this does not just apply to Hong Kong.

Across the world, the slumping credibility of business leaders should be a matter of acute concern to all of us in the business community. In the UK and the US, public antipathy is growing most rapidly around protests over top executives’ pay packages – or “quantum” as the investment community describes it.

Fuel also comes from a rising sense of unreasonable inequality, stagnating middle class incomes, and fear over declining career opportunities as jobs are “offshored,” or destroyed by robots and other new technology.

The numbers around the remarkable divergence between ordinary peoples’ incomes and CEO’s “quantum” are unprecedented.

In the UK, according to the consultancy Manifest, the average blue-chip CEO gets £4.3 million (HK$41.4 million, or US$5.34 million) a year, compared with an average annual wage of £28,000 – which is 154 times more. In short, the average CEO earns in two days what the average employee earns in a whole year.

In the US, the contrast is even more breathtaking. An S&P Top 500 CEO earns 335 times more than the average US employee.

For the average citizen, three questions arise: what miraculous talent can possibly justify such disproportionate reward? Is a company’s success truly mainly due to the talent of a CEO – what about the contribution of a conscientious and highly skilled workforce? And what extraordinary personal spending needs justify an executive demanding such huge rewards?

Most of us will over the past two weeks have noted the US$180 million pay-out made by Exxon to Rex Tillerson, its former chief executive, who has just been appointed Trump’s Secretary of State, and the US$285 million package granted to Gary Cohn, former Goldman Sachs’ number two, who has been appointed director of Trump’s National Economic Council.

Surely most reasonable people will wonder whatever these lucky men will ever do with such substantial lumps of cash. They can be creative I am sure, but it will take an effort.

In a rare and praiseworthy response to this sense that executive pay deals are running out of control, Simon Wolfson, CEO of Next, the clothes retailer, has distributed £8 million of his bonus to staff. Institutional investors are also putting pressure on companies’ remuneration committees to rein in the avarice of the CEO elite, to abandon “quantum” formulae that are based on LTIPs – or “long-term incentive plans” – and to replace them with “long term equity” – shares that will only vest after seven or more years.

Rebellions against CEO pay proposals broke out last year at seven of the US’s largest companies, and three big British ones – including BP, WPP, Reckitt Benckiser, Anglo-American and Oracle – and worse is expected in the coming reporting season.

For business-school types, and financially literate fund managers, such a shift in how to calculate how much CEOs are worth might make eminent good sense, and such battles might feel meaningful.

But I have a strong feeling such technical “fixes” focused on “pie enlarging” will go down like a lead brick with the mass of our hard-pressed middle class – the ones that are driving the anti-elite backlash.

The simple reality is that those middle class workers who have seen no increase in earnings of any meaningful kind for the past two decades, and foresee a future in which their kids will be even worse off than themselves, with poor job security and career-sapping technological upheaval, want scalps.

They feel angry that so many of those that fuelled the mortgage-based crash of 2008 have never been put behind bars, and even angrier that CEOs that have overseen poor corporate performances are still walking away from wreckage with multimillion pay offs bulging from their back pockets.

Like Martin Winterkorn, former head of Volkswagen, who earned a 6 million euro bonus even as he resigned in the wake of Volkswagen’s emissions cheating scandal.

Or Bob Dudley, CEO at BP, who earned £14 million even in a loss-making year. They want people like these to feel pain – just as they have been feeling – when they fail.

Edelman’s Trust Barometer captures this ugly upsurge quite faithfully, including in Hong Kong where Gini coefficients put our society among the world’s 10 most unequal economies.

It is true that some of this politically destructive bitterness will dilute a little, as and when we see a return of strong economic growth.

But I sense this will not be enough. Today, Edelman estimates that just 27 per cent of the Hong Kong community finds our CEOs credible.

Something more drastic has to be done if we are to “civilise capitalism,” as Australia’s Malcolm Turnbull suggested last year.

I sense things are going to get worse before they get better.

David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view