Don’t look at pay with ‘rosy glasses’

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Don’t look at pay with ‘rosy glasses’

In general, people are born with “rosy glasses.” These glasses show fantasy images and make you believe that you are superior to others - most of the time very absurdly. It is what’s called “illusory superiority” in psychology. Eighty percent of workers believe that they are better than average. Cornell University psychology professor Thomas Gilovich calls it the “Lake Wobegon effect.” Lake Wobegon is author Garrison Keillor’s fictional community where “the women are strong, the men are good-looking and all children are above average.”

German psychologists Volker Kitz and Manuel Tusch explain why companies keep salaries confidential using the Lake Wobegon effect. All employees evaluate their competency and value at a higher level than reality, and cannot stand their colleagues getting paid more. If the company makes everyone’s salaries public, employees would become unsatisfied. That’s why most companies keep salary information confidential and warn that sharing such information leads to negative consequences.

In fact, antagonism against high salaries is a basic instinct. Payouts to corporate executives became controversial in the United States in 1997, when Michael Ovitz, who served as the president of the Walt Disney Company for 14 months and was dismissed by Chairman Michael Eisner after disagreements, received a $140 million severance package. The deal stated that he would be paid if he was let go without proper reasons, which means he was paid more than $10 million for each month of his service. Disney shareholders sued Eisner and the board of directors, and after eight years in trial, the court upheld Disney’s payment.

But the judge stated in the decision that we can learn many lessons from the actions of the defendants about what not to do. Inspired by the case, the U.S. Securities and Exchange Commission now requires “clear, concise and understandable disclosure” of the amount and type of compensation paid to chief executive officers, chief financial officers and the three other most highly compensated executives since 2006. The law prevents hidden benefits such as complicated additional compensation through stock options or paying tax by proxy.

A few days ago, the National Assembly passed the act on compensation disclosure. The law applies to the registered executives of publicly traded companies who are paid more than 500 million won ($453,774). While the justification is transparent management, it will also give the salaried workers some relief. Along with the act on the subcontractors, this law is considered No. 1 and No. 2 of the economic democratization effort.

However, the effect is questionable. Some owners have already resigned from their boards. Companies may use various options to offer “stealth” compensation. It is highly possible that the disclosure would create instant fuss and become an annual event of venting anger. Instead of providing psychological relief, we would only realize that we have all been seeing through rosy glasses.

* The author is an editorial writer of the JoongAng Ilbo.

by Yi Jung-jae
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