A is for Apple…….P is for Pay

I expect that most people feel they are underpaid.  I would also suspect that if asked how salaries should be fixed, most people would struggle to agree on one universal method to do so.  Extend this across industries, markets, and regions and there would be an even more wide ranging points of view and justifications for how salaries need to be fixed and why.

In his column “Are Ontario teachers underpaid?” (Toronto Star, March 1, 2012), Sachin Maharaj offers us several reasons why he feels teachers are underpaid. He claims that teachers salaries should be viewed as an investment for ‘great teachers’ have life-changing impact on their students’ and in referencing a Harvard University on long term impact of teachers’, he goes on to state that ‘even if teachers’ salaries  reach the $100,000 mark, it would appear that they are worth many times that to their students in the extra income they (the students) will earn’.  In addition, he writes, that the social value of teachers’ – in making students more socially responsible and effective – needs to be taken into account as well when fixing their salaries.

Now, I have tremendous respect for teachers and there is no doubt in my mind that great teachers can have positive influence on students in developing them into social and economic successes.  I do believe that teachers play a critical role in society. However, till these investments can be effectively measured, qualified and priced, it would be exceedingly difficult to use this as a basis for fixing a teacher’s salary.  And because they cannot be measured – or at least effectively measured – they cannot be the basis to judge if teachers are underpaid or overpaid.

Mr. Maharaj does offer some approach to measurement – referencing the same Harvard study – in using the average of the students’ test scores as a measurement of the teachers “value-add”.  Again, this is flawed, for this approach measures the success on tests and not the value of education. Nor does it take into account the ‘non-test’ value that a teacher provides. Think about the teachers who were strong role models for impressionable children, think about the advice and guidance that good teachers provide on subject matters that could be generally classified as “Life” and goes beyond text books or an examination syllabus. Surely these need to be measured if ‘value –addition’ is to be the metric to be used to fix a teacher’s salary?

So are teachers underpaid? If so, what should they be paid? Generally, those that earn high salaries are those who possess unique skills or talents that are in high demand. So Sidney Crosby is certainly a highly paid professional, as are several lawyers, investment bankers and some neurosurgeons. Teaching – as much as it is a vital and important skill –  is not unfortunately particularly rare.

There is one Sidney Crosby. They are thousands of teachers. Few would disagree that currently there is an oversupply of teachers and not enough demand to absorb the all the new teachers entering the market. A February 2011 study by the Ontario College of Teachers puts the unemployment of teachers at 43%. The study projects that the number exiting the market (teachers retiring) will remain around 5,000 annually for the next seven years. The number of new entrants to the market (new teachers) in 2010 was 11,800. So the employment outlook for teachers in Ontario will continue to be pessimistic and less likely to improve in the new future because not only is there a continuing over supply of new teachers relative to vacant teaching positions, but there is the cumulative surplus of new teachers from previous years who have not settled into full employment as well. This imbalance of supply and demand should have a downward pressure on salaries. However the role and influence of the teachers unions will delay reaching this equilibrium.  And political agendas will distort these market forces.

So what about our NHL stars? Does the scarcity of people with hockey skills relative to the abundance of those with teaching skills alone account from the high salaries earned by NHL stars? Another key economic idea is at play here when considering what determines the high salaries that NHL stars enjoy compared to teachers. Ownership of unique talents is not sufficient to earn high salaries. There must be many buyers, preferable those with a lot of spending ability. It is also necessary to exclude those who not pay for those talents from enjoying the talent to drive the price up.

In the case of hockey, arena turnstiles and television rights contracts ensures this happens. Classrooms are open to everyone and no students pay the teacher. Teaching has but just one buyer – the government.  And in the absence of any metric to effectively measure the ‘market value’ of teaching, governments will evaluate teaching from how efficiently are costs being used.

So determination of teacher’s salaries will continue to be less about good or bad teachers, less about the effectiveness or non effectiveness teachers, but more and more about cost containment and cost reduction. For the government does not have to compete, where as the Pittsburg Penguins do.

When pigs can fly………..

On a cold Saturday evening we were sitting at The Disqussion Bar when someone raised the issue of executive compensation and its impact on innovation. I guess he should know. He worked for a company that was, once, a shining Canadian diamond on the international technology firmament. A revolving door at the CEO suite brought the company down on its knees to a point where it had to be chopped and sold off in bits. Yet, if my memory is correct, each CEO who passed through that revolving door in the last few years left a rich man.

The next morning as I sipped my coffee while reading the day’s headlines, my wife threw down the copy of a leading newspaper with disgust and left the room asking two rhetorical questions. “When will this stop?” “How greedy can they get?”

The article that caught her attention was one on some CEOs who, in this depressing business times, made money many times over than the average hard working North American wage earner.

“It is not greed”, I protested. I am a great proponent of greed. I am what I am and where I am because of my incessant greed for growth. In fact, to borrow a few lines from my favourite movie Wall Street, if there is one word in the English dictionary that encapsulates the evolutionary spirit of mankind it is GREED – in all its forms. Greed for life, for love, for knowledge, for growth and last, but not the least, for money. It is this greed that has brought our human race to this state of advancement in all spheres of life.

The media has, in recent times, vilified many executives for their lavish compensation and bonuses. Yes, the very media that, in better times, made celebrities of these executives by giving them prime real estate and glorifying their stratospheric compensations. So, what changed?

It is definitely not greed. What changed was that many of us human beings have crossed the thin line that divides the world of greed from the world of lust. It is the lust for power, for wealth, for dominance and for the spotlight that has played a huge role in the current situation.

In matters business the United States of America has long dominated the world – both in thought process and practices. It was here, in the mid-1900s, that the notion of separating ownership and management of business took root. Large family-owned enterprises began bringing in professional managers to run the daily affairs of their businesses. In 1976 an article published in the Journal of Financial Economics resoundingly criticized professional managers who, the article stated, were enhancing their own financial status rather than that of the shareholders.

This path-breaking article ushered in an era where “maximizing shareholder value” became the mantra of the day. Around this time a lot of other things were happening in America. Business schools, which churned out the ubiquitous MBA, were growing in their stature. The US of A had a Republican president in Ronald Reagan who considered himself to be a staunch anti-communist and an evangelist for capitalism and free market concepts.

This was the perfect time for professional managers to latch on to the mantra of maximizing shareholder value and have their compensation tied to this. The poster boys of this movement were two global icons  – Roberto Goizueta of Coca Cola and Jack Welch of GE. As the media idolized them, more CEOs’ climbed on to the bandwagon. As a means of accomplishing this stock options became a standard fixture of executive compensation packages.

This is where the waters got murky. Shareholder value has got nothing much to do with the present, which tends impact a very small fraction of the value of shares. Shareholder value is almost everything about the future. The biggest impact on shareholder value can be created by raising the expectations about the future performance of a company. This, unfortunately, cannot be met all the time. In this background, chief executives are forced to make moves that bring about short-term successes. Successes that make shareholders believe the future expectation can be met, thus pushing the market value up.

Nobody ever stopped to do a reality check. In the frenzy of the free market drive, oversight – regulatory and self – took a back seat; in fact it was non-existent.  Compounding the problem were the stock markets – the very institutions that defined value. Across the world stock markets have come to be dominated by large institutional players and the small retail players have disappeared (or ceased to make an impact) The flawed rewards process of the institutional players, where large bonuses were distributed on incremental results, only reinforced the short-term successes of chief executives and converted them to make-believe foundations for long term value creation. Together they created a huge bubble that, like all bubbles, had to burst at some point in time.

The current economic situation will not substantially alter the situation. While it has put the brakes on temporarily we run the risk of going back to the world of lust once the good times come back. It will take a lot on our collective part to come back to the world of greed and give up the world of lust.

So, to answer my wife’s rhetorical question, “When will this stop?

It will when, as immortalized by Lewis Carroll in the famous novel Alice in Wonderland, the pigs can fly.

%d bloggers like this: