What happened during the last few months, causing panic, hysteria and fear in the financial sector, makes more and more peple say: “Managers are greedy, corrupt and totally out of touch with the real world. They have no manners, no morals and no ethics. Do we, therefore, need a new moral in economy and politics? The answer is: no, we do not need a new moral in economy and politics. All we need is more readiness to adhere to the existing morals and ethics. Additionally, however, we need more competence when it comes to ethics and morals.
Because it does not look good. As early as 2004, according to a poll by the Emnid Institute for the World Economic Forum, 70 per cent of the German managing directors were considered dishonest and their behaviour unethical. 80 per cent of all Germans think that managing directors are too powerful.
To give you data for comparison: only 22 per cent of the French think their economic leaders are dishonest. Among the British, the number is 42 per cent, among the Americans 37 per cent, and among the Japaneze 47 per cent. As you see, we hold the record.
According to a survey by Ulich/Lunau/Weber of 1998, there actually is a stronger understanding why ethical behaviour makes sense and is necessary among enterprises. However, a rigorous application through individual measures that guarantee ethical behaviour is still sadly missing almost everywhere. We are talking possible measures such as moral balance sheets, ethics commissions or sheriffs for moral behaviour, along with a repertory of possible punishment or extensive ethical coaching.
The thoughtless way in which we treat ethics will probably only be modified when enterprises realize that 70 % of all European potential customers decide to buy in relation to how socially enthusiastic they perceive an enterprise.
Technical qualification alone is not enough.
The first helpful step can be taken when personel is selected. What kinds of people make a career in an enterprise? Managers are mostly selected according to their technical qualitification. Here, I demand that we modify our ideas. Besides the technical qualification, the social and ethical qualification should always be taken into consideration. Social qualification means that you can create a climate of trust. Ethical qualification means that you are perfectly capable of implementing a value system that does not only look good on paper, but is lived by yourself. For me, ethical qualification also means that you are capable of making decisions. However, it gives me pause to see how many meetings are sometimes necessary and how much time is sometimes wasted in order to come up with a decision that in retrospect turns out to be the wrong decision. Mind you, in principle it is not difficult to make decisions that make sense. Greek and Roman dialectics have developed all the methods. All we have to do is learn and apply them rigorously.
Basically, this is where my article could end. But things are nowhere near as easy as they look. We are all children of this society. Economic leaders and politicians, too, are children of this society. Unfortunately, that is where conditions are often lamentable.
Because of the financial crisis, our politicians, at long last, want to set an upper limit to managerial incomes at 500,000 Euros. And a few weeks before the outbreak of the financial crisis, several Europoean governments wanted to limit the tax reducable income of managers to one million Euros. In the following chapters, I will expand on this is detail.
What is interesting about all those accusations is that the arguments are based on moral, rather than economical categories. Since Cicero, moral is nothing more and nothing less than a catalogue of norms made by a society in order to guarantee social acceptance. However, in this context, moral is too limited for my taste. Why so? Because every society develops its own morals and every society guarantees its social acceptance individually. The French consider other things morally justified than the Italians, the Indians, the Greeks or the Germans. But the question of how high managerial income should be has now become an international, even global issue. And this can no longer be answered by moral categories. Instead, we will probably only find an answer through an ethical component that overcomes the strict social boundaries. This is why I want to extend the range of discussion by ethics as a field that independently develops high goods considered worth saving. It also determines which activities are the best means to protect these high goods. Because basically what we are talking when discussing managerial income is justice – one of the fundamental ethical questions.
Above all, the public discussion shows us one thing: there is no suitable standard by which to determine if an income is just or not. The problem will definitely not be solved by putting managerial income to the test of whether or not certain groups in society find it adequate or not.
Justice and reward – can the two go together?
Even in ancient times, the question of justice was subjected to intense philosophical debates. Aristotle, for instance, taught the “Nikomachical Ethics”, which is an ethics of virtues. You did the right thing if your activities realized something that was good for the entire society. For him, justice was the most noble of all virtues. The technical term was Eudaimonia. As far as he was concerned, a citizen could only achieve Eudaimonia if he increased the well-being of other citizens. It is interesting to note that, for Aristotle, the citizens themselves were responsible for the well-being of everybody, rather than the state. Therefore Aristotle would probably not have asked whether managerial income should be as high as it is. Instead, he would have asked what managers do in order to optimize the well-being of the citizens. In an enterprise, the modern term for this is “corporate social responsibility”. So Aristotle would not have made the managerial income an issue, but rather the reason for it.
Social Justice
Social justice, too, gets some attention when managerial incomes are discussed. Under the headline “Social Justice”, important clerics like the Archibishop of Munich, Reinhard Marx and the state bishop of Hannover Margot Käßmann, condemned managerial income in “Der Tagesspiegel” as “perverted”.
Let us now look and see if managerial income can be measured by the standards of social justice.
The problem with social justice is that there is no general, let alone consensus-based definition of the word. It is possible that the reason for the dilemma lies in article 20 of our constitution. Among other things, this article says: „The Federal Republic of Germany is a democratic and social federacy”. Unfortunately, a clear definition of the word “social federacy” is not given. The only statement we find in the constitution on the subject is that nobody can sue the state for what is socially his due when it comes to justice in distribution. Although everybody wants social justice, there is no way to generate it through a federal bill. The idea of re-distribution does not really help, either.
Consequently, the Nobel Prize Winner for economics F.A. von Hayek thinks that there are three reasons why the re-distribution of money earned by all citizens as arranged by the state is wrong.
1. He was convinced that the market (and thus also the labour market) will spontaneously cause a certain order in society. Which then will generate a moral of its own. And he believed: „These moral concepts are too much of a challenge for our potential of reason.“ For him, the consequence of this was that you must not correct it through politics. Von Hayek was also convinced
2. that the market, and thereby also the income, results from unintentional individual activities. They thus cannot be evaluated according to theories based on justice.
3. Thirdly, von Hayek believes that more than a few success stories in the past were only possible because managers were in a position to consciously give social life a certain direction. For von Hayek, these three arguments clearly deny a state-controlled income system. He was in favour of both equal rights and total freedom to draw up contracts. No matter how where an upper limit for incomes are, von Hayek was against it. The only social instrument he recommended is a transfer-based minimum security – which can be found in article 20 of our constitution, anyway.
Is our social market economy deprived of the “social” component because of the financial crisis?
What exactly does this mean for the question of how much money who should earn? It means that talking about social justice when you mean managerial income is a total confusion of terminology. Even Karl Marx demanded as early as 1875: „Everybody according to their abilities, everybody according to their needs.“
First and foremost, we need a social market economy that also has humane components. For me, a humane market economy is one where socially accpeptable behaviour is in harmony with economic activities. It is not acceptable to try for socially acceptable behaviour without continuing economic success. And likewise, it is not an option to put economic success before everything else and let social life suffer. Let me remind you of what Ludwig Erhardt said: “The freer an economy, the more social it is”. Everybody wants to be socially acceptable, because even our constitution says in article 20: “The Federal Republic of Germany is a democratic and social federacy”. But the founding fathers of the constitution forgot to define what exactly they mean by social, which means that social justice cannot be achieved by a federal bill. The SPIEGEL, too, said that “the social federacy as practiced in Germany” has become “a giant threatening to be smothered by its own dimensions”. The SPIEGEL even came to the conclusion that our social federacy is “deeply unjust, because the distribution of services is often at random and more than likely to overlook the really needy people”. Public discussion shows that, apparently, we have no criteria for a fair distribution of capital and labour.
For me, just reward for labour is primarily dependent on the gain in value, which is not always easy to determine. Simultaneously, the increase of value for an interprise can play a role. While this differentiation does not feature in the public discussion, it is still significant for the moral and ethical evaluation.
Is increase of value a fair basis for how high the income should be?
According to the rules of income for many top managers, much of what they earn is dependent on capital profit and share price. For ethical evaluation of managerial incomes, you should know that enterprise capital is not a net product, but an increase of value. The share price and balance profit are an increase of value. The net product factors are labour, qualifications of employees, mobility and enterprise culture. Thus, the net product does not happen through the capital but through the people. Capital is merely a condition for production, which certainly is no argument against a fair service of capital.
It is the strategically most important task of a manager to make sure that the enterprise will continue to thrive. As a general rule, this happens through improving the competitiveness. There are different approaches, for instance cost reduction, entering new markets (internationalization), or new products and production methods (innovation). The consequences of most of these measures cannot be measured in terms of economy at decision time, still they have relevance for the income. Demanding that the enterprise value increases (and coupling this increase with more income) is what certainly comes closest to performing the task successfully. However, the value of an enterprise can only be determined exactly by selling it, which is something that normally no shareholder wants.
This leads to the question of the extent to which managerial income should be based on shareholder value orientation. Shareholder value orientation as basis for income is counterproductive if and only if the owners are interested in high dividends, rather than in, for example, increasing the value of the heritage. Microsoft, for instance, hardly paid high dividends for almost 20 years. Nevertheless, the shareholders could rest assured that the balance profit remaining in the enterprise would lead to a higher substance increase than on any bank account. Thus, an orientation of managerial income by the shareholder value as value increase would be undisputable and objective if the stock market price were the same as the enterprise value based on net product. Unfortunately, the problem already starts with the expectation of net product. The stockmarket, after all, is mostly psychology, rather than an image of economic reality. Moreover, the market environment, general economic situation and enterprise (i.e. risk) structure, rather than managerial achievement, have considerable influence on the evaluation. Which is where the current system, which determines managerial income components through stock market value (for instance as options), is questionable. What is measured is not the actual improvement in competitiveness, but the game on the keyboard of the stock market. An extreme example is the profit in options won by Herrn Schrempp at DaimlerChrysler AG. He won 50 million Euros through the fact that Herr Zetsche reversed the decisions made by Schrempp!
To me, even the net value does not seem to be suitable as a basis for directors’ incomes. As a general rule, directors do not contribute to the net value. The net value of an enterprise can be determined by either computing the productivity or the distribution, both with the same result. Computing productivity happens through subtracting the prior achievement from the total achievement. That means it is approximately (!) identical with what the net sales tax is based on. The distribution computation is the sum of employee income (managerial income included), capital income (alien and own capital) and general incomes (taxes). Thus, the employees’ incomes are always part of the net product, whereas the directors’ salaries usually are not. Under the criteria of justice, it is quite disputable if there is a fair relationship between employees’ income and capital income. I know no theory that comes to an acceptable conclusion on this. The product-and-cost theory, too, fails in this respect. That means that the net product as criterion for evaluation must also be discarded. In the current social-political debate, it is two ways of thinking, rather than two basic beliefs that fail to match. On the one hand, we have economical arguments, on the other hand one-sided concepts on justice. Of course, a consensus is not possible, except if you are prepared to accept ideological ways of thinking.
What remains is the question of morals in general and, in particular, morals in economy. Moral is often used as a counter-argument against meaningful economic statements. However, we should be aware of the fact that our moral concepts, when scrutinized in detail, are as heterogeneous as our genetic fingerprint. Neither in science, nor when talking morals do we find an Archimedian point of enlightenment.
As early as the last century, Jean Babtiste Say wrote that the interest of the capital owner and the interests of the enterprise, as represented by management, oppose each other. The enterprise wants to improve the enterprise value. The capital owner wants the profit on the money provided by him to be as high as possible. According to the principle of Say, the interests of the owner run contrary to the interests of the enterprise. This controversy should also be seen in managerial income. For managers, the first duty should be to promote the enterprise value, rather than the shareholder value.
An enterprise oriented solely on the shareholder value is one that is poorly organized even by economic standards. What an enterprise should aspire to is serving both labour and capital fairly. And that means managers have to answer the question whether their contribution to the value increase was achieved through a contribution to the net product.
Is the income of top managers adequate in terms of net product?
First and foremosts, the determining factor for the value is demand. This would then be market justice. This method is certainly the least controversial, since – if the number of income recipients is high enough – it reflects the criterion of net product or the share of profits, which from the economic viewpoint is definitely fair.
But in the case of top managers, even this gets questionable for two reasons. Firstly, people might get the impression that a “bunch” of directors and managers help each other towards comfortable incomes. Secondly, the enormous increase of income is justified by comparing them internationally (in particular with the USA). And there they say that the high incomes are due to the capital market evaluations: enterprises are considered as products and the managers’ task is to get active in a quasi value improving way by this standard (which actually is not a promotion of the net product). I cannot see a solution of this conflict. All that remains is the hope that these escalations (i.e. the influence of capital markets) will ebb again and managerial achievements will again be measured by true achievement, meaning lasting improvement of the competitiveness. Unfortunately, so far, there is no economic standard for this kind of achievement.
Putting the lid on managerial income
Currently, many people demand a lid on managerial income. As a reason, we hear about discrepancies only true for a maximum of 500 board members. It is true that Herr Ackermann earns about 285 times as much as an average bank employee, but a lid on managerial income should do more than just serve emotions. It should be justified, which is where greed and avarice play a role. Our top managers are criticized for being greedy, so they will probably reciprocate by calling the accusers avaricious. The problem is: how to define the upper limit of incomes?
And there is one more thing: maybe we should ask whether many of the accusations are true or justified at all, or whether they are false accusations.
Part of these accusations is, for example, that allegedly income is a result of nepotism. There are more than a few unionists who say this, even though union representatives sit on the boards. So far, the famous attitude of unions: “income is something for capital owners” only resulted in unionists’ abstension when it came to voting on the board members’ income. By voting, these unionists could influence the outcome, but that is not what they do. That means that the accusation of nepotism is a false accusation, at least in so far as the unionists are concerned.
Then there is the often-cited accusation that there is too little tranparence in incomes. But our minister of justice, Brigitte Zypries, successfully introduced a law in 2005 that forces enterprises to publish openly what their directors and board members earn. It is, however, true that special bonuses, bond options, etc. cannot be found out easily. Every enterprise has its own way of budgeting and reporting. This is why the number of people who understand the entire process is extremely small, and it is rather tedious to find out exactly what a director actually takes home.
One of the severe accusations against enterprises is the fact that managers need not take legal responsibility for their mistakes and even get golden handouts as farewell presents. So far, this accusation is one that actually has some truth to it. Even though the law has a regress demand, the board members have so far been very hesitant about pressing charges. Most managers have insurance against wrong decisions. The Corporate Governance Commission advised to require that managers pay a certain percentage privately, similar to the fully comprehensive insurance for cars. The main problem is that the definition of “unfaithful behaviour in a leading position” lacks precision in our legal code.
The current discussion about limiting managerial income poses one question: who is the real hypocrite?
Berthold Brecht said once: “the real fraud does not rob a bank, he founds a bank”.
Currently, no matter what Deutsche Bank Chief Ackermann does, it is always the wrong thing. At least that is how it seems. He is accused of being a hypocrite after having abstained from taking extra boni, but many of his critics are just as hypocritical.
When Ackermann announced that he wanted to abstain from taking his bonus this year, I initially found it a good idea, since it looked like he wanted to be symbolic. Then he added that his bank would be ashamed to take advantage of the federal package for saving the banks. With this, the game got a new direction. I had hoped he would say he was ashamed for having, along with his collegues, made deals the risks of which nobody could see through. As it was, he divided the banks into two classes of banks, signalling that those bankers who took advantage of the federal package should be ashamed. In my book that is rather hypocritical. Let us exemplify this with the issue of his boni. After all that has transpired, we can safely assume that there would not have been a fat bonus for him this year, anyway. You can only abstain from taking something if something is your due. The greatest financial crisis in 70 years also minimized the profit of Deutsche Bank, not taking into consideration that they were part of the actors in this “gambling casino”.
During the financial market crisis, the balance between morals and economics was sadly missing.
Unfortunately, the financial crisis showed that the persuit of economical success clearly has precedence over ethical and moral values.
It was exclusively economic issues that had priority – even including products that nobody understood any more, except that they were good for making money. Some bank managers acted insincerely, in that they failed to ask themselves if the recipient of a credit is actually solvent, since credits could be sold on and the risk did not matter any more. This was certainly very unethical.
Nobody can deny that bankers have gambled at high stakes in the name of their customers, their banks, and our country. Consequently, silent and modest behaviour might have been more suitable than this announcement by Ackermann in “Bild”. That means that the bad feelings about Ackemann and his announcement are – to a huge extent – absolutely justifiable.
Economy has to be a better model of responsibility. Calling for politics and new laws is not good enough.
In the sense of a humane market economy, I believe that – first and foremost – the economical leaders themselves are called upon to pair their economic activities with social concepts, both inside and outside the enterprises. This is also true in the face of globalization. Politics can create an adequate environment. For example, politics has to see to it that whoever makes decisions also has to accept responsibility for his decisions. Also, politics should make sure that only products that everybody understands are sold. It cannot be allowed that whatever can be sold may be sold. Also, the managerial responsibility should be extended. What we need is not stricter laws as demanded by politics. I believe the existing laws should be more rigorously applied. That is where the problem lies. If someone gambles with other people’s capital and loses, then he should be held responsible. A mere insurance is not good enough. We need a personal liability. At least a part of managerial incomes must be reserved for covering the risks of their decisions. If you sell fakes, you should be legally responsible.
Politics, too, have been a failure.
Again and again, disputes arise around banks not being subjected to enough control, but politics, too, have contributed significantly to the financial crisis. May I remind the readers that the Commodity Future Trading advised the minister of finances of the Clinton government Alain Greenspan to forbid certain derivate transactions? Both Clinton and Greenspan opposed vehemently. Later, the political concept of the Bush government of “every American without the necessary means should become the owner of a house” resulted in loans being granted without securities. So politics have no right to pretend that bank managers are the only parties responsible. And then there is the third party, the consumer, who had no second thoughts at all about living on borrowed money. If politicians had seen to it that certain products are forbidden and that the liability regulations are renovated, then some things would certainly not have happened.
Politics declaring that they are scandalized is hypocricy.
The federal packet certainly has its problems. But I still believe that it is correct and makes sense. In times of crisis, necessary steps have to be taken. It was important to put a stop to anxiety, panic and hysteria. However, if the state intervenes, then it should be only for a short time and not detrimental to competition. If politics take away part of the bank’s competitiveness, then it will ruin parts of the market economy. The Green party demands more operative control by politics over the banking business. Seldom have I heard such nonsense paired with ignorance. The KfW bank alone burned 12 billion Euros through catastrophic mismanagement of her most important affiliated bank IKB with currently almost worthless US loans. For the last four years, the boss of KfW has been the former “financial speaker” of the SPD. Although he had been aware of the loss of KfW for more than half a year, financial minister Steinbrück sent his socialist mate into early retirement with unrestricted millions of pensions only shortly before the financial crisis finally broke out. On the KfW board, politicians of all persuasions can be found, even Oskar Lafontaine. To me, the critisicm of this aspect by the Green party sounds rather insincere.
Minister of finance Steinbrück openly admitted that he cannot find an experienced banker who is prepared to steer the KfW out of its crisis for “little money”. Under his supervision, it was agreed to that the new man at the top is to receive an income of € 850,000.00 per year. Now, politicians finally want to restrict the income of bank directors who accept the federal package to 500,000 Euros. In private economy, incomes of a million and more are (still) something for stock holders. THEY abstain from taking dividend profits or stock value increases when agreeing on too high bonuses. The tax payer does not pay. He only profits, because the directors’ incomes are subject to the highest tax rate.
I am sure there are quite a few people in this country who think correcting the boundless excesses of managerial income is a very appropriate method. For some, it might even give rise to satisfaction. However, the satisfaction should not be too great, because there are other, otherwise seldom outlined, aspects.
The populist Left party, for example, ignores them on purpose – and is rewarded by triumphant increases in the number of voters come election time. That is why I want to take this opportunity and remind you that no politician was ever asked to take financial responsibility for having failed in his state, county or communal budget planning. Not ot mention that there was never a politician who agreed to work for a single Euro less – least of all the “Left party” boss Oskar Lafontaine who lives in high financial comfort, even though he was and still is a board member at KfW.
The fact that Lafontaines puppy candidate for next year’s federal presidential election, Peter Sodann said he “would like to put Ackermann behind prison bars if he could” shows how low the standards of the discussion have sunk.
Let me repeat: retired politicians and party favourites were allowed unrestricted managerial freedom in politically oriented banks. Apparently, they are grossly overpaid – nevertheless, so far they have not agreed to work for a single € less. Also, keep in mind that incomes of a million and more are still reserved to stockholders in the private economy. They forego dividends and stock value increase when agreeing on too high bonuses. The tax payer does not pay a single cent.
Again: nobody needs to feel sympathetic towards Ackermann and his collegues and it is high time that something should change. But this should be discussed in a rational way and not with slogans taken from the most primitive class struggle, even if the times for this seem to be better than they have been for a long time.
Tax deducibility of managerial income
Long before the financial crisis started, the tax deducibility of managerial income was discussed. A working group of the SPD came up with proposals, even though the financial senator of Berlin, Thilo Sarrazin (SPD), thinks that the demands of his party on deducibility of managerial farewell-gifts is a “performance to laugh about”. In the ARD program “Anne Will“, he said: “this is classical symbolism politics with no positive effect at all”. After all, managerial income, so the SPD politician, amounts to only “a few promilles of the entire federal income”. Neither will a new law regulating smaller farewell-gifts make a difference: “They get the same salaries”. The minister for labour and social affairs in Northrhein-Westphalia, Karl-Josef Laumann (CDU), on the other hand, showed himself sympathetic towards the demands of the SPD: “We need a society that holds together, and for such a society, symbols are also important”.
After the debate about managerial income has been going on in Germany for quite a while, the EU, too, is now concerned with it. “It can no longer be tolerated that certain enterprise directors profit from too steep incomes and, above all, golden handshakes, both of which are not justified by their achievement”, said Jean-Claude Juncker, the head of the Euro-group and prime minister of Luxembourg after a meeting of the Euro-zone national financial ministers.
A small minority of EU countries is already taking measures against too steep managerial income. In the Netherlands, future farewell-packages are subject to 30 per cent tax, provided the yearly income of the party concerned is more than 500,000 Euros and the package is higher than one year’s pay. According to the finance minister of France, Christine Lagarde, the war against the “occasional lack of transparence when it comes to incomes” is also under way. Last autumn, the French national assembly voted for a law restricting tax deduction of farewell-packages for firms to one million Euros.
In professional sports, we already see quite well the grotesque consequences it can have if income is only deductible in parts. “If football players had to pay the entire tax rate up from a certain income, some soccer clubs would face considerable economical problems”, says Carsten Kreklau, member of the BDI general board of directors.
Lawyers, too, have their doubts as to the initiative being beneficial: though applauding the idea of a common approach of all European nations, Marcus Lutter, head of the Centre for European Economical Law in Bonn and member of the federal commission German Corporate Governance Codex, says: “that would make it impossible to solve the problem by going abroad”, but has his reservations about higher taxation: “Such a measure would just punish the shareholders through lower profits, and they are the most innocent of parties”.
I took a look at the SPD working paper under the aspect of ethics. It says: „During the last few years, the increase of managerial income, in particular of board members in big enterprises, has differed drastically from that of common incomes: for example, the income of the DAX enterprise bosses used to increase 14 times as much as that of a common labourer. Now the increase is 44 times as much. This development is currently continuing.“
That is a lie. You have seen the numbers of the statistical federal bureau above.
The working paper is full of false accusations. There is one thing you should know. Accusations are only ethically justified when true. Otherwise, we are talking pure polemics, where the rule of honesty is violated. We read about “breathtaking increase of managerial income” and enterprises disregarding the “interests of the stakeholders”. Allegedly, we have “managerial income that is over the top and distorting competition.”
Among other things, the working group recommends “to limit the tax deducibility of managerial income and farewell packages as necessary expenses of the enterprise to around one million Euros plus 50 per cent of what exceeds this amount”.
What is sadly missing are transparent economical and legal or ethical reasons. Why one million and not more or less, why 50 per cent and not more or less? This is consistent throughout the entire paper.
We find a similar scenario when it comes to the farewell packages. Here, too, politics want to put a stop to current procedures. So let us see if the accusations are true. The accusation that packages are decided totally at random cannot be upheld. After the Corporate Governance Commission had recommended to limit the packages to two yearly incomes, “Welt” reported after a survey that newly made contracts already adhere to this system. Since the commission recommended it, 14 board members have signed new contracts with a package sum of two yearly incomes. That means that the recommendation is already being put to practice.
From its work, in particular the work of its employees, an enterprise gets a profit that is hopefully significantly higher than that of other enterprises in a comparable situation. Accordingly, the distribution of profit is only fair if all employees, down to the economically weakest, benefit. So how did the enterprise distribute the profit to those employees who also contributed to the value increase but are not board members in the form of income, pay, or bonuses?
However, justice of distribution does not mean that profits are equally distributed. Rather, a fair differentiation can be made if even the weakest employee still benefits. This might already be the case if the board member sees to it that a weak employee can keep his employment if a different situation would have meant him being made redundant.
The factor is important
You should also take into consideration that the income is based on an arithmetic factor. It is rather evident that most enterprises make the same distinction between normal employees and those of the first hierarchical order as between those of the first and second hierarchical orders. In the same manner, this happens between the second and third hierarchical order. However, as soon as we reach the board member level, this factor does no longer seem to be valid. There is a discrepancy between managerial income and the income of the next lower hierarchical level. To this day, this discrepancy has not been sufficiently explained. So far, the only attempts at explaining said that we need to supercompensate because of the enormous income of American board members, along with the market value. Neither the value increase, nor the value exploitation extent can really explain the high incomes. That makes them ethically problematic.
The rich in Germany
The desire to take as much as possible from the rich is not a new one. However, the poor never became rich because the rich were made poor. Friedrich August von Hayek (1899-1992), liberal brain and Nobel Prize winner drily commented: “The demand for equality is synonymous with taking away as much as possible from the rich. After distributing the loot, people notice that now there is no more equality. Instead, there is commonly less wealth.” And John F. Kennedy, 35th president of the USA, described the connection between growth, which generates wealth at the upper end of society, and mass wealth: “If the flood comes, all ships on the surface of the water will rise with it”.
In other words: a recipient of social security today has a far higher standard of living than a well-paid labourer had in the fifties. This fact is largely due to the rich: the upper five per cent of the income pyramid in Germany (with a yearly income of more than 85,400 Euros) pay more than 40 per cent of all income tax, whereas the entire lower half of recipients of income only pay 8.3 per cent of all income tax. The number of rich people in Germany stagnates: while more and more people world-wide own at least one million dollars (2004: 8.3 million, which is an increase of seven per cent from 2003, total volume 30.8 billion dollars), the number in Germany increased only by 0.6 per cent to around 760,300.
The “tax for the rich” suggests that the top earners do not pay enough tax. In reality, the “broad shoulders” already carry a lot more of the tax burden than all other tax payers. All citizens earning more than 67,000.00 Euros per year (that is only ten per cent of all tax payers!) contribute to the total tax volume by 53! per cent for the state.
In the Federal Republic of Germany, there are currently around 35,000 people earning more than 500,000.00 Euros per year. That is only 0.13 per cent of all tax payers. However, their contribution to the total tax volume is around 13 per cent.
In June 2008, the magazine CAPITAL asked some top managers and politicians how much income tax they had paid. With the exception of Peter Müller, prime minister of Saarland, none of the politicians, including the federal chancellor, were prepared to answer the question. Peter Müller paid 35,700 Euros income tax.
The top managers, on the other hand, answered as follows: Götz Werner paid seven million, Herbert Hainer of Adidas paid 2.5 million, Martin Winterkorn of VW 2 million, the Conti-boss paid 1.2 million. Wiedeking pays income tax in the two-digit million sphere. Jürgen Grooßmann of RWE, too, pays considerably more than ten million. As can be seen in the statistical federal bureau, people earning more than 548,000 Euros pay more than 8.2 per cent of all income tax, even though they are only 0.1 per cent of the tax payers. And if you take all people earning more than 170,100 Euros, then you have exactly one per cent of all tax payers, paying 20.4 per cent of all the income tax. That means: nobody is pretending poverty. The accusation that rich people do not contribute enough to the total tax volume is simply wrong, if not a downright lie.
Finding the rise of managerial incomes in German Dax enterprises outrageous, the then minister of labour Franz Müntefering said that many German managers earn “a thousand times as much as” their employees. That statement is wrong. To be sure, the top earner of all Dax managers, Josef Ackermann, got 13.2 million Euros in 2006, but even his most basic labourers earn more than the thousandth part of this, namely 13,200 Euros. Managers who are not quite as affluent as Ackermann earn far from thousand times what their employees earn. According to the latest survey, Dax managers earn an average of 3.42 million Euros, which is a hundred times as much as their normal employee, rather than a thousand times as much. Müntefering confused his arithmetic, so part of the uproar is due to a mathematical mistake.
Even managerial incomes of a hundred times as much as their employees are rather the exception to the rule. In middle class and smaller stakeholder companies, managerial incomes normally exceed that of their employees by a factor between 10 and 20. Excesses as witnessed in the USA hardly ever occur in this country. For example, after having received a billion dollars in shareholder options, William W. McGuire, the boss of the health insurance company United Health now has to pay back half of it. The only German manager who might come close to the magical number of thousand is Wendelin Wiedeking of Porsche. He, however, created such high values and saved so many from unemployment that I guess even Müntefering will not hold it against him.
Regardless of these facts, politicians of all parties except the FDP saw fit to make the best of this opportunity and use it for rousing public sentiments. Renate Künast, speaking for the Green Party, called managerial incomes in the millions “amoral”. For the united employees organized in the CDA, Gerald Weiß, the deputy director said that it is “socially and ethically not acceptable if people some of whom wasted millions walk home with royal farewell gifts”.
For the Leftist Party, Oskar Lafontaine came up with an actual recommendation: He wants to adapt managerial income to “the standard of the Ukraine”. A law should forbid that anybody can earn more than twenty times as much as the poorest earner of the entire enterprise. Surprisingly, Chancellor Angela Merkel seconded him on the CDU party convention in Hannover: „If someone has done a lot for his enterprise and the employees, then it is fair to pay him well”, is what she said. “However, what I do not understand at all is why people who have been a total failure are showered with money.” The audience applauded frenetically. If something is as popular as this throughout all parties, it might soon become law.
However, politicians are hesitant about giving a reason why they consider one factor just and another factor unjust. How much more can a director justifiably earn? Ten times more than an administrative employee, a hundred times more, or a thousand times more? In his “A Theory of Justice” of 1971, the American philosopher John Rawls (1921-2002) shows a way towards an answer to this question. He declares that fairness is the central term when talking justice. A procedure is fair when two requirements are met: firstly, the same basic freedoms for all, and secondly equal opportunities and the so-called principle of differences. What Rawls means is that social inequalities are only justifiable if even the least privileged member of society still benefits from them. According to Rawls, nobody must fall through the net because of personal characteristics that cannot be held against him, such as education, skin colour, sex, but also intelligence and talent.
Based on this, Rawls experiments mentally: humans are imagined to live in a fictional basic situation, camouflaged underneath the “veil of ignorance”. They have no idea what the future will hold for them: poor or rich, director or porter. Now they are asked to agree amongst each other what would be fair for any possible situation in which they might later find themselves. Since every one of them must fear that he himself might end up on the lowest step of the ladder, he will try to give maximum value to the minimal status. This is called the MaxiMin rule – it means that you make the best of the worst situation.
So much on John Rawls. What agreement would a director and an administrative employee come to under the veil of ignorance? Doubtless the result would be that the employee gets enough money for a flat, food, clothes, health, travel, car, gas, and the education of his children. In other words: for a burgeous existence. It is not necessary to think big, but he wants a chance to move upwards. Progressive income and professional advancement opportunities are a must.
As soon as this is agreed upon, the managerial income will be discussed. Both parties will mentally go to the sunny side. Here, too, an agreement will be reached quickly: if you are talented and hard-working, you obviously want as much money as possible. Both parties would consider a law determining the upper limit unjust, no matter where the factor for the upper limit would be. It goes without saying that both would prefer the factor 1,000 to 100 or 10.
At the same time, under the veil of ignorance, both of them also would want to be accepted as a rich person by all of society, including the administrative employee. Nobody wants a public demonstration in front of their villa. Consequently, the wish for a desired income is: I would like the kind of money that my administrative employee would consider adequate for me. Thus, the factor depends on social acceptance.
This acceptance, however, cannot be pre-defined from the outset. It depends on how content the administrative employee is with his own situation. If he himself constantly gets extra money and promotions, then he might even find a factor of 9,000 adequate for his boss. On the other hand, if nothing in the way of promotion ever happens and probably even a downgrading is imminent, then even a managerial income of ten times as much as one’s own is not acceptable.
Consequently, Rawls says: if you let your employees benefit, then you can easily inflate your own income, as well. No law can regulate this dynamic bouncing-back. It can only be done through individual income agreements in firms and sectors. Upper limits will only de-motivate. What matters is the fairness and understanding by the individual directors – in their own interest.
A little more competence and a little less emotion would go far when it comes to sitting in judgement over the adequacy managerial income in general and during the financial crisis in particular. Unfortunately, more than a few people currently adhere to the motto: “Why should I seek competence, since my mind is made up already”.
Let me make one final statement:
In the Federal Republic of Germany, capitalism cannot do what it wants. Our politics of law and order do not permit it. On the contrary. In international competition, the front hooves of the enterpreneural donkey are often massively chained. It shows ignorance to start morally accusing now him now in order to make him run faster.
UDP
(translated by Evelyn Gemkow)
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