Compensation conundrum

Kim Yeong-ook

Pop quiz: How much does a man need to earn to make his wife happy? Fifty million won ($47,263) per year? One hundred million won? Five hundred million won?

The answer: any amount larger than what her sister’s husband makes. A wife will be content as long as her husband makes more than her sister’s husband.

According to behavioral economics, people compare their situations with others. So even if one may not earn much, it can be sufficient to know one makes more than others. The opposite also holds true. Even when you are paid handsomely, you can feel irritation or discontent if your salary is smaller than others.

A recent release of salaries sparked the debate over the correlation between satisfaction and income. The annual compensation of directors of listed companies who get paid more than 500 million won per year was made public for the first time. Koreans learned that a great many people make more in a year than they could earn in a lifetime. So many husbands would feel discouraged and their wives anything but content. A sense of immense unfairness is spreading. As a result, people say they have lost the motivation to work. In a country where anticorporate sentiment already prevails, the authorities created an unnecessary controversy.

But the list also had its positive aspects. It definitively revealed that executives have been paid too much for their service. SK and Hanhwa owners who are in jail and who made scant contributions to their companies were still paid tens of billions of won. GS Engineering and Construction and Geumho Petrochemical had losses last year, but their owners still received several billions of won. A management structure in which the owner exercises full authority turns out to be problematic. In case of Hyundai Motors, the gap between owner-chairman and hired CEOs was serious.

In fact, there’s nothing wrong with disclosing such compensation at public companies. Who would oppose the idea of transparent management and compensation? The disclosure of directors’ salaries is required by a law passed last year. The law had a hidden agenda: to lower directors’ compensation in general and reduce the gap between the directors and their rank-and-file employees.

The United States was the first to make the executive salaries public. While those disclosures began in 1934, criticism over enormous paychecks only picked up steam in the early 1990s. People said the executives were overly compensated and the income gap was growing while the economy was sluggish. The moves to regulate compensation spread, and amendments were made to the income tax act in 1993. On top of that, the Sarbanes-Oxley Act and Dodd-Frank Wall Street Reform and Consumer Protection Act were also enacted in 2002 and 2010, respectively. When executives are compensated excessively, shareholders can advise the board to reconsider the payouts.

Germany, Japan and Switzerland have similar laws. Regulations on compensation became stricter after the 2008 global financial crisis. The public complains that bankers in particular brought on the crisis but are still paid handsomely while the ordinary family suffers. The authorities want to lower executive compensation, but the government cannot lower it directly. So compensations were disclosed, and the companies are pressured to keep their payouts reasonable in consideration of hostile public sentiment.

Does that really work? It seems plausible and some owners actually paid back a portion of their salaries after they were criticized. But America’s actual situation proves the folly of the idea. Salaries actually went up, according to the Economic Policy Institute. Last year, the gap between CEOs and regular employees at 350 companies became wider. In 1978, CEOs were getting paid 29 times the pay of workers on average. After the regulation was reinforced in 1995, that multiple became 123 times and then 383 times in 2000.

As behavioral economics teaches us, people compare themselves with others, and no matter how handsomely you are rewarded, you will feel discontent if your salary compares unfavorably with others. The CEOs who were not paid as much will want to be paid more, so the discrepancy intensifies. It is the paradox of salary disclosure. Also, the distortion of human resources distribution becomes more serious. Competent people would want to work for companies that pay more. Those seeking money wouldn’t want to be civil servants, university professors or journalists.

How do we cheer up discouraged breadwinners? One way to please them is to argue that the high-salary earners are stingy. It is not entirely ungrounded as that’s what a team at Cornell University has found in a study.

Translation by the Korea JoongAng Daily staff.

JoongAng Ilbo, April 3, Page 28

*The author is an adviser at the Korea Institute of Finance.

By Kim Yeong-ook