Aug 16, 2007

Of CEO salaries and Capitalism

In recent times, the high salaries drawn by CEOs in India have been questioned by some. Even the PM has suggested that they should be lowered. This post presents a counter-opinion, and a lot of other thoughts.

First of all, let us correctly identify the problem. The situation is that a few people in this country are earning a lot, while many continue to live below the poverty line.

Let us, for the sake of discussion, take income as a proxy for happiness. I know this is a very narrow and materialistic view of life and happiness, but it is a simple and valid approximation (find me someone who is NOT happy to earn more, and I'll take that back).

Now, some people have a lot of 'happiness' (to the extent of living in a noxiously lavish manner), while some have little or no happiness (being driven to the extent of suicide). Reducing CEO salaries makes CEOs less happy, and does not make the poor any happier.

One scenario in which the poorest could benefit, was if they got the money that the CEOs had to forego. However, this scenario does not play out in real life. Any reduction in CEO salaries will only add to the company's bottomline, and eventually be distributed to the shareholders. The shareholders are definitely upper and upper-middle class people, who already have enough cash to risk investing it in the stock market. So, all that the CEO salary cut will accomplish is some re-distribution of wealth among more or less affluent people, while being singularly severe on one sub-group (CEOs).

This surely does not sound like a real problem has been correctly solved. So, I conclude that the CEO salaries are not the problem at all!

The problem is clearly with the poorest lot, and the solution is to enable them to earn more. To draw an analogy, if you have a traffic jam due to a bottleneck junction, you construct a flyover in place of the bottleneck. You do not pass a law forbidding people from driving at speeds above 20 kmph.

But if high CEO salaries are not the problem, why are people protesting against them? The answer is - the stark disparity between income levels draws attention to the real problem (poverty) which is difficult for the administrators and polity to solve. Their defensive response is to divert attention from the real problem (poverty) and make the public believe that the symptoms (disparity) are the problem. This works incredibly well in a country where, historically, denial was respected, and profit was considered a dirty word.

Regarding the re-distribution of wealth mentioned earlier, I believe that no one has any right to decide how wealth is distributed, other than it's creators. This is a fundamental concept of Capitalism. People receive rewards for what they accomplish, and are not obligated to share with others who had no contribution. Many of my fellow-countrymen find this idea difficult to accept. "One can not be so selfish. We have to take some responsibility for the weaker". This line of thought is probably a product of our education system - which drills into our heads that pure capitalism is evil, and socialism is noble.

However, socialism, as nice and humane as it may sound in theory, simply does not work. Consider these cases:
1. USSR and USA - both became superpowers after the first World War. USSR did not survive the 20th century.
2. East and West Germany. One country split into two after the second World War. At the time of re-unification, West Germany's per capita income was about 4 times higher than the Communist East.
3. North and South Korea. Separated after the Second World War. Today, South Korea is on par with the Developed nations, while the Communist North has a GDP per capita only 1/13 (yes, one by thirteen) that of the South.

I could argue that the Capitalist system is the most efficient and practical, but I'm sure someone would produce some ideological argument in favor of Socialism. So I just cite historical, empirical evidence (above) in support of Capitalism, and rest my case.

I believe our Constitution still proclaims India as a 'sovereign, socialist, secular, democratic republic', and we are taught in school to be proud of all these. But later, objective education at good institutions has made me (and probably many others) realize that the 'socialist' there was a mistake our previous generations made, and it's high time we corrected it. India will not realize her potential at the World stage, unless we break free of the socialist legacy, and genuinely embrace Capitalism.

Another thought I feel I should include in this post. CEOs salaries, unlike any other income levels in the country, are determined by International supply-and-demand. Indian companies will be run by the best, only if they are paid the amounts that some people find obscenely high. If these guys are offered less, they will simply go and ply their trade elsewhere. This is exactly how the infamous 'brain drain' had started. If India wants to be counted as a World Power in the 21st century, we can not repeat the same mistakes.


  1. salaries, jobs, position all should be abolished. everybody should hunt. no guns either. just bow and arrow

  2. dude... no blogs for quite a while.. whats up. You did not follow up on my tag as well...