Different Perspectives – Income Disparities and Turmoil

This week the world witnessed the turmoil in Egypt. Sitting so far away one can appreciate the courage of people of Egypt to stand against an autocratic regime. Their unity is their strength and they are valiantly fighting for their rights, which have denied for them for a long time.

World citizens get inspired by their actions, and jolted out of your apathy. If we have democracy, we mistakenly believe that all is right and we as citizens need not do anything. However, misuse of power is a worldwide phenomenon, the rich are getting richer and the poor are getting poorer. Most of the polices are geared towards protecting the people in power and keeping the poor under their feet. Unfortunately, the average middle class citizen feels a sense of honor and privilege to be a pawn in the game of people with clout.  Instead of realizing that in the end, they are selling their souls for their own imprisonment.

In this week, the first post is from A Night Light – “We’re better off than Egypt – Right/ Let’s take a look”. The author has compared Egypt’s position with America. He has pointed out that the causes of Egypt youth uprising are prevailing in US too. The percentages of poverty, joblessness, income disparity are more or less same.  Reading the post, one has to think – Does US also need a revolution?

The second post is from The Ethics Sage- “Executive Compensation and Unemployment: The Rich Get Richer”. The post tears your heart as it shows that the CEOs who fired the maximum number of employees during recession earned the biggest salaries and fattest bonuses. The stress, anxiety and insecurity caused to millions of workers to provide a privileged lifestyle to a few. Should society be paying such a heavy cost for the happiness of a few?

The saga of disparity and false sense of entitlement does not end there. Economic Times reported in their article “The Poor as Puppets” and other related articles how microfinance companies senior management is making astronomical earnings at the expense of the poor women who initially invested in the companies. Share Microfin converted the savings of poor women into share capital in 1999 to meet the minimum requirement of turning the NGO into an NBFC. Later external investors bought the shares, the promoters made a killing and the women got peanuts. To give you an example here is another article, Share Microfin MD takes home an astronomical 7.4 Cr, more than double HDFC Bank MD’s salary. This is the worst case of exploitation of the poor by the rich, because these poor women don’t even have food to eat. Have we turned blind to the pain of other people to fill our own pockets?

Click on the headings to read the full posts below.

1.    We’re Better Off Than Egypt — Right? Let’s Take a Look. (via A Night Light)

Imagine: A government run by and for the rich and powerful. Leaders who lecture others about “sacrifice” and deficits while cutting taxes for corporations and the wealthy. A system so corrupt that rich executives can break the law without fear of being punished. Increasing poverty and hardship even as the stock market rises. And now, a nation caught between a broken political system and a populist movement that could be hijacked by religious extremists at any moment.

No wonder they’re upset! Why, we’d be marching in the streets too.

Here’s the reality: Income inequality is actually greater in the United States than it is in Egypt. Politicians here have close financial ties to big corporations, both personally and through their campaigns. Corporate lawbreakers often do go unpunished. Poverty and unemployment statistics for US minorities are surprisingly similar to Egypt’s.

And remember the ratings agencies that told us everything was fine with our country’s banking system, right up to the moment it collapsed? Just two months ago, Moody’s reassured investors that the Egyptian government had a “stable outlook” for the foreseeable future.  Sure, the analogy only goes so far.  But why is it so much easier to see what’s wrong on the other side of the world than it is here at home?

 2.    Executive Compensation and Unemployment: The Rich Get Richer SEC Adopts ‘Say on Pay’ Rule (via Ethics Sage)

The CEOs who laid off the most employees during the recession are also the CEOs who took home the biggest pay checks, according to a study released last week. CEOs of the 50 U.S. firms that slashed the most jobs between November 2008 and April 2010 took in 42 percent more than the average CEO at an S&P firm, according to the 17th annual Executive Excess study by the Institute for Policy Studies. The study also found that 36 of the 50 layoff leaders “announced their mass layoffs at a time of positive earnings reports,” suggesting a trend of “squeezing workers to boost profits and maintain high CEO pay.”

The 10 “highest-paid CEO layoff leaders” ranked in the report include the CEO of Hewlett-Packard, Mark Hurd, who earned $24.2 million in 2009 as the company laid off 6,400 workers and Walmart CEO Michael Duke, who earned $19.2 million as the company laid off 13,350 workers. No Wall Street banks were included in this list, but three banks — Citigroup, Bank America and JP Morgan — showed up on the study’s list of the 50 firms that laid off the most employees. Goldman Sachs announced that it boosted the base salary of its executives and partners for the first time since the firm went public in 1999, tripling Chief Executive Lloyd Blankefein’s salary to $2 million. I suppose that’s not enough for Blankenfein to live long-term so he also received restricted-stock awards as bonuses for $12.6 million. The stock award is 40 percent higher than his $9 million bonus for 2009.

Overall, the study found that executive pay remains astronomically high compared to previous decades: “After adjusting for inflation, CEO pay in 2009 more than doubled the CEO pay average for the decade of the 1990s, more than quadrupled the CEO pay average for the 1980s, and ran approximately eight times the CEO average for all the decades of the mid-20th century.” Currently, CEOs of major U.S. companies average 263 times the average compensation of American workers, the study claims. Compare this with the UK (22 times), Canada (20 times), and Japan (11 times).

3.   Share Microfin MD takes home an astronomical 7.4 Cr, more than double HDFC Bank MD’s salary ( via Economic Times)

His business is at the bottom of the pyramid, but not his compensation. Udaia Kumar , promoter of microfinance company Share Microfin, draws a salary unmatched by any executive among listed banks.

In 2009-10, Kumar earned 7.4 crore as managing director of his own microfinance company. This is more than double of what the highest-paid executive in all listed banks made that year — Aditya Puri, MD of HDFC Bank , earned 3.4 crore. This is more than the limit set by the Companies Act, which regulates the operations of firms in India. Share Microfin is India’s thirdlargest microfinance company.

An ET investigation on Monday had unravelled how 45,000 poor women shareholders in a few large microfinance companies, including Share Microfin, had missed out on the benefits of wealth creation — some due to transactions engineered by promoters, some due to the structure used to house the shares of the poor.

“When you are dealing with the poor, it does not appear morally right to take such compensation given that the income is coming exclusively from the poor,” says MS Sriram, adjunct professor at the Indian Institute of Management, Ahmedabad. Sriram documented such promoter-friendly payouts in his March 2010 paper titled ‘Commercialisation of Microfinance in India: A Discussion on the Emperor’s Apparel’.

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The top executive of the other two leading microfinance companies, SKS Microfinance and Spandana Sphoorty , earned more in line with corporate standards. Suresh Gurmani, who quit as CEO of SKS Microfinance last year, earned Rs 1.7 crore in 2009-10. Padmaja Reddy, promoter and managing director of Spandana Sphoorty Financial, earned Rs 1.4 crore. Kumar’s remuneration comprises salary and the value of stock options issued to him. A significant portion of Kumar’s remuneration comes from sweat equity — shares issued at zero cost. As per a scheme which began in 2007, Kumar will receive 1.4 million shares over three years.

In 2008-09, his remuneration of Rs 8.1 crore — including Rs 5.3 crore as salary and Rs 2.6 crore as sweat equity — exceeded what is permissible under the Companies Act. The Act, which regulates the operations of firms in India, says a company cannot pay more than 5% of its net profit to a director without government permission. In the case of Share Microfin , that figure for 2008-09 worked out to Rs 4.6 crore. But the company paid Rs 8.1 crore to Kumar, for which it got approval from the ministry of corporate affairs. The same year, even Sravanthi was paid about 80% more than what the Companies Act automatically allows — Rs 3.2 crore against Rs 1.8 crore

This makes me wish that corporate employees globally join hands to create the biggest corporate revolution, maybe the first of its kind. Business ethics cannot be taught to people who gloat and boast about their capacity to do wrong and get away with it. The need of the hour is for corporate employees to confront the senior managers for their wrong actions and hold them accountable. The employees should stop fearing the consequences of job loss and retaliation, because if they succumb to it now, they will live their whole life in fear and anxiety. It is better to die one death rather than die every day to live a life.

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  1. Pingback: The Negative Impact of CEO Pay & Power on Corporate Culture and Governance « Sonia Jaspal's RiskBoard

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