An entrepreneur risks bankruptcy and an executive on payroll is fully protected by collective labour agreement. How honest is our income tax policy, comparing the situations of entrepreneurs, executives and employees for example? Salaries and extras should depend on the risk taking and the (possible) outcome. How is this incorporated in today’s society? More and more organisations are freezing salaries and strike out bonuses. Often a good thing, because in most cases there doesn’t seem to be any relation between the amount of money and the performance. In years of financial crisis, increasing lay-offs and redundancies by reorganisations rewards for the already well paid executives may seem unbelievable unfair, even inhuman in public eyes. What seems to be totally overlooked are the circumstances in which people work; in this case not the environmental circumstances, but the financial arrangements. We are ignoring the risk component that people are or aren’t dealing with. Risk should play a crucial role in how income taxes and discharge arrangements are settled. Not only to minimise the income gap, but also to establish fair play on the labour market.
Why should executives automatically be on the better side of the gap?
Financial bonuses are a typical American way of rewarding for company results. But why just reward the (top) executives? Let’s put it this way: why reward the CEO with significant amounts while his or her share of the company results is not even demonstrable? What about the staff employees who actually do the work that gains the returns and profits? Rewards should be within reach for all of us, no matter what your job title is. If you helped creating the end results, you should earn the extra pay or secondary benefit. The more you can demonstrate your share in obtaining the targets, the bigger your share of the total reward should be. This means transparency will become more crucial in income policies.
I’m not saying that executives shouldn’t get higher rewards than employees. This is where the transparent policies will kick in, with risk and profit closely connected. As entrepreneur you mostly take more risks, in return you should be rewarded with a plausible share. So, to evaluate if rewards are justified, the leading questions should be: what was the risk that the executive took to get that incredible bonus? And what would be the prize he had to pay if the results were bad? These two outcomes – in the positive and in the negative case – should somehow be in balance. Still, why should that only count for executives? In case of employees – if the outcome of performing badly would be discharge, that would be a high risk. So, should that also be rewarded equally if their performance contributed to the company profit? Or would in their case good performance be self-evident because they are getting paid for it?
Some opposite examples
A recent article on ABC News drew my attention because in times of a growing income gap between top executives and employees this CEO’s action was rather outrageous. In short, the article tells you a story about an executive that disputes the income gap by starting the change within his own company.
Dan Price, 30, announced this week that any employee at his company, Gravity Payments, making less than $70,000 annually will receive a $5,000-per-year raise or be paid a minimum of $50,000, whichever is greater. The aim: By December 2017, everyone will earn $70,000 or more.”
Apparently this is his way to get in pursuit of a less distracted and more engaged workforce . It was a bold strategy to retain talented workers, also it will make this company a widely desired perch in the business world. It appears that Gravity already has benefited from this charitable stunt of the CEO. An increased number of new clients have signed up and a lot of new job applicants that are eager to work for this company. Who can blame them. A pay above market standards sounds attractive to anybody.
At least the discussions are spotlighting how the income gap between top executives and their employees continues to widen. These discussions also contain possible approaches according a few high profile persons.
A quite the opposite situation has occurred at ABN AMRO, where the Dutch nationalised bank’s executive pay packets caused an outcry, all the way up to a political debate.
What would be the way to go when it comes to the income gap?
Income gap leads to demotivation
It’s the inequality within income policies that makes society react strongly to income issues. When the income policy and the rewards policy are fair and transparent up front, you will create a support base you need to build and maintain a profitable business. A misunderstood income gap will lead to demotivation and disengagement of employees. Also can it impact your brand. With unfair rewarding and recognition programmes you won’t be first on the list of talents out there. The lack of motivation amongst the (potential) work force will in the end negatively influence the results. It is not about being rich. It is about surviving society and being treated fairly for working hard.
The social character of startups
Startups often offer a general profit sharing policy and the opportunity to become shareholder, because within their strategy they have incorporated the principle that company results are the outcome of joint effort. Such rewarding programmes acquire much support in the current working climat and entrepreneurships. With salary costs existing out of a fixed income and a flexible income, that means that in times of crises the total cost for salaries will decrease automatically due to the decrease of profit. In practise it appears that startups have engaged employees that perform very well. They are driven by their own entrepreneurship within their jobs.
Taxes, pay and risk should be in balance
Salary should contain a certain risk component; reputation, job loss and personal loss are the risks that need to be incorporated in salaries. When an entrepreneur earns a lot of money, still there will always be that risk of losing everything hanging over your head. So proportional taxes means turning in your safety net. I think tax and labour laws should act different when someone is on a payroll with a salary of 200,000 euros, enjoying all the benefits of secondary labour conditions and the collective labour agreement. Why not pay more taxes than lower incomes? Why cash severance pays at discharge for high incomes?
We owe it to society to adjust our laws and regulations on this part. With a fair system everybody can pick their strategy – do you want to be an entrepreneur or work on a payroll? Only than we can demand people to accept the terms and accountability that come with that strategy.
We need to change the way we assess our work and incomes, so we can build a social ecosystem.
Arjen van Berkum
Arjen van Berkum is a columnist, keynote speaker and motivator, with an eye for business ecosystems, innovation and disruption. In addition to his work as technology and contract management evangelist, he is a visiting lecturer at Delft University of Technology (TU Delft).
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