Fair pay for government corporations

August 24, 2010

Managing For Society, The Manila Times

Once again, heads are shaking over the size of compensation received by directors and top executives at government owned and controlled corporations (GOCCs) and financial institutions (GFIs). I last wrote about this more than five years ago when reports about executive pay in government corporations similarly shocked the public. GSIS President Winston Garcia, for example, was then reported to be receiving around P500,000 in monthly compensation.

Based on recently published figures obtained from COA, it appears that things have only gotten worse and more shocking than half a decade ago. As a result, legislators are again considering, as they did years ago, legally capping pay at government corporations. Still others are urging the President to use his existing powers to slash executive pay at these corporations.

I don’t believe that a legal cap is necessarily a better solution than simple good corporate governance. Corporations are autonomous entities. Boards of directors are expected to exercise judgment in the long-term interest of the corporation and in pursuit of the corporation’s mandate. Boards are, therefore, given much leeway in deciding on compensation packages.

Therefore, the President must make board director appointments with extreme care. These should be upright individuals with sufficient technical knowledge to oversee the corporation. More importantly, they should be nationalists who understand their role in supporting the country’s aspirations. Once appointed, board directors should make transparent decisions, similar to expectations for boards of publicly listed corporations. Compensation packages should be among the decisions that are transparent to the public. In the current situation, holding board directors accountable by asking them to explain the compensation packages they have approved is certainly called for.

The problem is when the judgment of board directors is severely out of synch with basic tenets of morality. We then have a situation where the pay packages are legal but immoral. The problem is that boards apply faulty market-based reasoning as follows: The top leadership needs to be given generous packages because the government is competing with the private sector for much needed director and executive talent.

This is an unfortunate fallacy. The government has no business competing with the private sector because it can never afford to, given its perennial deficit. In the second place, government corporations aren’t even really competing in the market. They are usually monopolies or near-monopolies. With such captive markets, how can top management claim that they work as hard as their counterparts in the private sector? Thirdly, these top executives do not compete in the open market for executive talent. Most of them are in fact hand-picked by the sitting government. They should, therefore, behave more like trusted stewards (which is what they were appointed to be) than self-interested free market agents. As trusted stewards, they deserve reasonable pay and not competitive pay.

What standard of reasonableness should boards use to justify the higher pay levels of top executives? Social justice principles argue that a structure that creates inequality among people is just if it is in the best interest of the least advantaged. This implies that a corporation’s executive pay levels must be sensitive to the situation of its worst-off stakeholders. For government firms, these are their ordinary government employees and the ordinary Filipinos they serve. It must also be remembered that government corporations are not judged mainly on the money they make but on the quality of public service they provide.

Therefore, a rule of thumb that a prudent board can use is to limit the top executive’s pay to no more than a defensible multiple of the minimum wage. For example, I estimate that a multiple of twenty times does not exceed P200,000.00 a month. Although still higher than the Philippine President’s salary, it is much lower than some of the pay levels we have been seeing and has the principled advantage of being sensitively anchored on the situation of the least advantaged Filipino worker. To ignore this consideration is rightfully seen as unconscionable or, in local parlance, garapal.

Dr. Benito Teehankee is an associate professor in the College of Business of De La Salle University. He may be emailed at teehankeeb@yahoo.com.