Business ethics expert Ulrich Thielemann talks about worrying trends in income distribution and applying the principle of fairness to pay bargaining.
The interview was conducted by GUNTRAM DOELFS and KAY MEINERS./Photo: Michael Hughes
Mr Thielemann, the top-earning CEO among the companies quoted on Germany’s DAX index currently has a salary of around 17 million euros. At the same time, some collective agreements in Germany stipulate annual salaries of less than 10,000 euros. Can we really still claim to have a social market economy?
As far as income is concerned, we have moved a long way away from the idea of a social market economy where everyone gets their fair share. The relationships between different people’s salaries are absolutely crazy. And things are a whole lot worse in the US, where the top 40 hedge fund managers take home an average of 300 million dollars a year. It beggars belief. In both the US and Germany, there is also a lack of genuine transparency concerning the exact sums being earned by these individuals. This departure from the social market economy has its roots in a simplistic belief in market forces.
When you talk about the relationships being crazy, are you referring only to the extremes or to the entire wage system?
Actually, I’m talking about more than just the wage system. We need to be having a debate about the disproportionate growth in unearned income compared to earned income. The relationship between the two has become ridiculously distorted, especially in Germany and the US. Executive pay is just a small part of the total picture. The huge sums earned by top executives are mostly due to the unearned income they receive as opposed to their salaries. You can’t just keep pretending that an executive’s pay is simply a reflection of how much value he or she has created. There comes a point when they are clearly just siphoning off the profits for themselves.
Could you give us a brief outline of the “total picture” you referred to earlier?
An NGO called Faireconomy carried out a study of the different income quintiles in the United States. Between 1949 and 1979, all the income quintiles grew at more or less the same rate. Since then, it has been the upper quintile that has enjoyed the lion’s share of the growth. Nobel Prize winner Joseph Stiglitz calculated that the average US worker earns less today than they did in 1969, while the richest one percent of the population has seen its income shoot up over the same period. This is simply not a fair reflection of their performance. We have witnessed a similar trend in Germany, albeit not quite to such a ludicrous extent.
In the US, economists are carrying out a lot of research into the growing disparity in incomes. Why has hardly any research been done on this subject in Germany?
Obviously, no-one wants to get involved in an argument that says it’s all just sour grapes from lower earners. However, saying it’s sour grapes is just a way of distracting people from the real issue of income distribution. In actual fact, the issue of fair income distribution is perfectly legitimate and indeed extremely significant. It isn’t just a case of solidarity with those who aren’t getting a slice of the profits, it’s also a question of ensuring that everyone involved in creating value is treated fairly. Fairness is a counter-argument to the idea that everything is determined purely by market forces. The free marketeers don’t care whether your success is down to value creation of siphoning off the profits, the only thing that matters to them is that you are successful.
There are a lot of managers who would be only too happy to calculate the contribution that each individual worker makes to the company’s profits and use this as the basis for determining their pay.
Even if we ignore the difficulty in measuring an individual’s contribution, this view assumes that a company’s only goal should be to maximise profits by any means possible, to the exclusion of everything else. Forgive me for being blunt, but there can never be any justification whatsoever for this profit maximisation approach. I fully accept that businesses need to be profitable. But there is a very big difference between making a profit and maximising your profits.
What aspects should be taken into account in order to ensure fair pay?
The key aspects should be the demands and workload placed upon the employee, their qualifications and their performance. This should very definitely also include the effort that they put into their work. But if I could tell you how to calculate what fair pay is, we would be living in Plato’s utopia where philosophers are kings. We wouldn’t even need collective bargaining any more. Determining what constitutes a fair wage is largely a matter for the collective bargaining partners at a given site – it isn’t something you can ask a moral philosopher to decide. The moral philosopher’s role is to clarify the issue at stake and the relevant perspectives that need to be taken into account. Neither side should be looking to bleed the other side dry.
Why is that so important?
None of us works alone, we all depend on the work that others have done before us and we all have to co-operate with others. At the same time, however, we all work against others. By this I mean that every strategy that is successful for a particular individual, every innovation, increases the competitive pressure on others. And this applies just as much to wage dumping as it does to paying your top executives exorbitant salaries. To quote Schumpeter, innovation is a form of creative destruction. By innovating, you destroy other people’s income stream.
What conclusions do you draw from all this?
We cannot allow unbridled competition. If we do, we will end up becoming slaves to it. Innovations are never an unequivocally good thing – they make one man rich and another poorer. Competitive pressure increases, fuelling growth but also creating more stress. Is this all still conducive to a good standard of living? People should be allowed to ask these questions. It’s not an all-or-nothing scenario, it’s more a question of how much competition we should allow. And that is a political, global governance question and also a corporate policy issue. Some businesses take a very conservative approach. They sell the same good-quality product unchanged for decades and still manage to be very successful.
But surely far more of the companies with a conservative corporate policy that shies away from innovation have ended up going bust?
Yes, that can of course happen. But those companies fail because others have ratcheted up the competitive pressure on them. Is that necessarily a good thing? What are you trying to say with your question? That we’re no longer even allowed to challenge this never-ending spiral of competitive pressure? Nowadays everything, both individually and politically, seems to be about becoming more competitive. We have two choices: we can either meekly accept this state of affairs, or we can start thinking about how to limit this competition.
How do you see your proposal working in a globalised economy where the shareholders sitting in San Francisco or Shanghai have a very different understanding of value creation to the one you have just outlined?
We can’t just pretend there are no alternatives and allow the shareholder value model of value creation to reign unchallenged in its pursuit of maximum shareholder profits. If we do that, companies will become just another interchangeable tool that their so-called owners use to feed their insatiable appetite for profit.
Are you saying that untrammelled global competition in the real economy can have a destructive impact?
It’s actually the problem at the root of the financial market crisis. Companies bent over backwards to court investors, allowing them to play different locations off against each other without any restrictions at all. The consequence was that investors were able to get their hands on a huge proportion of the value added that these companies were creating. And in the meantime, the heart has been ripped out of American industry. Are we supposed to go on like this? Are we just going to allow market forces completely free rein over everyone, including investors, or are we going to say enough is enough?
But the alternatives are controls on capital transactions, tariff barriers and protectionism, aren’t they?
Even perfectly “reputable” people are starting to talk about capital controls again. These were of course widespread during the years of the economic miracle – and I don’t think that’s a coincidence. The same is true of a balanced tariff system. Tariffs help to check unbridled competition. There are other ways of regulating competition, too. For example by restricting the variable parts of executives’ remuneration packages. The trend towards performance-linked incentives has forced many companies to go down this route even if they didn’t want to. It fatally undermines good corporate governance.
So are you arguing that companies should exercise restraint and avoid extremes, even if some of their competitors refuse to do the same?
The common denominator of a properly functioning, humane market economy is that the market is fully embedded into the idea of achieving a decent standard of living and fair coexistence for all. It poses the challenge of democratically developing a form of regulation to ensure that those who choose to act responsibly do not lose out as a result of doing so. Good regulation should not make it unnecessary for people to act responsibly, that would be over-regulation. It should just create the conditions where it is reasonable to expect people to behave responsibly.
And what makes good corporate management?
Good management needs to strike a fair balance between the extremely wide-ranging expectations that different groups have of the company. Investors do of course have a right to earn income on their investment, but no more than that. Good management is only possible if the pursuit of profit is no longer the be-all and end-all. Once people get their heads round that idea and we stop teaching the exact opposite message to students, there will be a completely new mindset in the corporate world. Social enterprises have, of course, already been doing this for several years.
Do you think social enterprises could provide a model for the economy as a whole?
Yes, I do. Instead of focusing on maximising profit, they have other fundamental goals. This is a fantastic approach. The goal of Switzerland’s Alternative Bank Schweiz (ABS), for example, is to promote social and environmental projects. This is of course extremely difficult in a competitive environment where their much bigger competitors can offer a cheaper service. Nonetheless, they have the right mindset and they have made a good start. This is the only justified approach to managing a business.
ABS is a social enterprise that employs about 80 people. You developed a number of recommendations concerning its employees’ pay. What principles did you use to do this?
The principle of sharing success among all the employees is given concrete expression in ABS’ statutes, which stipulate that the company’s highest-paid employee cannot earn more than five times as much as its lowest-paid employee. Indeed, when I started working with them in 2008, the ratio was only 3.4 to 1. Management thought this was being a bit too egalitarian and were keen to introduce a greater performance-related pay element, but I rejected this idea.
At ABS there are now moderately large differences in employees’ basic salaries and there are even financial rewards for outstanding performance. Did you actually increase the pay disparities at the company?
It is important to establish a clear distinction between success and meeting targets on the one hand and performance and effort on the other. Whilst a focus on the former inevitably results in incentive-based management, there is nothing in the second approach to preclude occasional bonuses. Everything should be governed by the fundamental principle of fairness – those people who have made a contribution should be appropriately compensated for their performance and effort. This allows excessive disparities to be prevented. There is something fundamentally immoral about a management style that reduces employees to little more than Pavlovian dogs that need to be offered incentives in order for them to complete certain tasks.
But surely an excessively egalitarian approach is going to make it hard to attract highly skilled workers?
Even at ABS, there were the doubters who thought that the 1:5 ratio between the lowest and highest salaries would make it impossible to find enough good people. I always responded by asking who these good people are. Are they the people who will enable the highest shareholder value to be achieved? If they had started thinking along those lines, ABS would have been finished as a social enterprise. The competition issue is undoubtedly a complex problem. At a fundamental level, it can be addressed through regulation.
Debating distributive justice has become fashionable since the recent financial market crisis. Has something really changed this time?
These debates certainly aren’t just a fad, they are addressing a serious problem. But the overall picture isn’t quite so clear-cut. It is true that economics is in crisis and ordinary people have had enough. But nothing else has really changed at all. People still bend over backwards for investors, just in different ways, for example through state-guaranteed loans for bad banks and the ECB. And through a neoliberal agenda that now wants to apply economist Hans-Werner Sinn’s old German kill-or-cure remedy to the whole of Europe. Where is this all going to end? In a plutonomy with a rich minority – whose wealth is fuelled by unearned income – appropriating an ever greater share of the value added for themselves? Joseph Stiglitz says that people who were free market fundamentalists before the crisis continue to be free market fundamentalists after it. And that’s exactly what has happened. People are still obsessed with market fundamentalism. What we need is a revolution in economic theory. We need to stop worshipping the market and start restricting it.
On the web site of your organisation “Denkfabrik für Wirtschaftsethik” (Think Tank for Business Ethics) you have published a “memorandum for a new economy” that has been signed by a number of predominantly left-wing economists.
Is that how you see them? What I see is mainly sociologists, political scientists and theologians, together with a few unconventional economists. The published list of signatories contains several executives who have obviously grown tired of the way everything in their organisation revolves around money. Or what about Meinhard Miegel? Are you telling me he’s left-wing? I’m not really convinced we should be looking at the world in terms of left and right. Unless of course by right-wing you are referring to the market fundamentalists. In that case I’m more than happy for you to call me left-wing.
(Translated by Hugh Keith from magazin Mitbestimmung 5/2012)
ULRICH THIELEMANN was born in 1961 and is the Director of the Denkfabrik für Wirtschaftsethik MeM (Think Tank for Business Ethics and a Humane Market Economy) in Berlin as well as deputy chair of the Advisory Board of the Ökosoziales Forum Deutschland. Between 2001 and 2010, he was Deputy Director of the Institute for Business Ethics at the University of St. Gallen. In his lectures and writings he argues that business should be underpinned by ethical principles. His criticism of Switzerland’s “missing sense of injustice” in relation to the country’s status as a tax haven provoked considerable public controversy there in 2009. He published his post-doctoral thesis in the same year, under the title “Competition as a concept of justice. A critique of neoliberalism”.