Why Spanish executives deserve a drop in salary

Ignacio de la Torre. Professor. IE Business School

7 November 2013

How can you justify the fact that the average Spanish worker has to work 21 days in order to earn what a Spanish CEO gets for one hour’s work? The answer is that right now you can’t.

How many days does a Spanish employee have to work to earn the same amount a CEO earns per hour? Some seven days, according to data published by The Economist, as shown in the table below. If we are talking about an employee who is in the lowest wage bracket, it would be 21 days. Said relation is due to the fact that in 2012 a Spanish CEO earned on average 792 dollars an hour, while mid and low-level wages are generally lower in Spain than the European average. 

As the table below shows, if you look at the comparison between the days worked by a worker in a low income bracket and the amount of money a CEO earns in an hour, Spain is in the unwelcome position of being the fourth most unbalanced country in Europe in terms of difference between lowest and highest earners, after Romania, Ukraine and Russia (three countries that are known for having extremely low levels of income per capita).  The countries where the imbalance is least pronounced have a far higher GDP per capita: Norway, Switzerland, Iceland, Ireland, Denmark, and Germany. 

Moreover, in spite of the fact that the cost of living in Spain is lower than the Eurozone average, it is noticeable that the 792 dollars that a Spanish executive earns, on average, per hour, is far higher than the 551 earned by their French counterparts, or the 546 paid to German executives.

Pay in Europe

So what is so special about CEOs in Romania, Ukraine, Russia and Spain, that we are obviously missing? In theory, a price, including that of a salary, should be based on market factors: supply, demand, and productivity. Where supply is concerned, we could argue that that an executive is very well paid if there is little tradition in a country of training executives and there are therefore very few of them. The growing legion of Spanish executives educated in the best business schools in the world, both in Spain and abroad, since at least the sixties, would appear to rule out that possibility.

Demand could be driven by a sudden increase in national or foreign investment, which coupled with a hypothetical limited supply, would produce a rise in salaries. The fact that in Spain investment has dropped by over 10 points with regard to the country’s GDP during the crisis (probably the largest drop in investment in Spain’s history) would appear to contradict that particular hypothesis.  There is still a possibility that Spanish executives are so well paid as a result of their business skills, which would be evidenced by productivity levels, which in turn would translate into rising profits and solvency. Hence, if the corporate fabric, within the Spanish economy as a whole, had been seen to maintain reasonable levels of debt, or acceptable profit levels, this third hypothesis just might hold water. Given the fact that our corporate debt is far greater than just about any other western country as a percentage of GDP, and the fact the amount of corporate tax paid is at a record low, I think are justified in questioning the likelihood of this third hypothesis being possible.  

The word on the street is that there is a fourth hypothesis that might explain such a disparity, namely the pathetic standard of corporate governance of a large number of companies. The fact that an Italian CEO earns 957 dollars an hour, even more than the Spaniard, only serves to strengthen this particular hypothesis.  If we look for a common denominator for Ukraine, Russia, and Romania, this fourth hypothesis gains even more ground. The problem is that this hypothesis is pernicious, because it actually goes against market forces.

A particularly grotesque example of the underlying thrust of this article, is the horrendous situation regarding the remuneration of the top executives of many Spanish savings banks, before and after their nationalization. The well-worn argument has been that the salaries were designed to “attract talent”, or that “they are in line with market levels”.  The first of these, given the way the banks have been plundered and the resulting profit levels, is an insult to our intelligence. The second is based on the reasoning that “if all the other executives in the sector are getting a thousand dollars an hour, that must be the going rate”. In order to make this stick they hire a prestigious HR consultant who duly states that this is the amount that executives working for the competition earn. Many of these “competing executives” in the savings banks and regular banking sector have been mindless authors of accounting fraud, massive scams inflicted on retail clients, and directly or indirectly responsible for the injection and probable loss of public money to the tune of at least 70 billion euros.  Nevertheless, the destructive practice of “keeping up with the competition” was wheeled out to justify this abuse.  

There will be no economic recovery unless the question of morals is sorted out first.   Spanish society and its workers have made enormous efforts during the crisis, with big drops in wages in both nominal and real terms, and significant increases in productivity. Executives have to do their bit by basing their salaries on real productivity levels and getting rid of abusive golden parachute clauses (which occasionally result in multi-million payouts for less than a year’s work), which have brought about the decapitalization of many a firm, resulting in larger numbers of layoffs among average workers.

Wage disparities can be justified by many factors, and they play an essential role in capitalism, but only when a disparity is based on market forces. As far as I am concerned there is no evidence that such forces exist in Spain to any degree. If the “forces” driving such injustice have more to do with bad governance or an attempt to build an oligopoly, then that means that it is tantamount to perverting society, along with capitalism itself.

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