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Dublin: 12 °C Wednesday 1 October, 2014

Aaron McKenna: Large pay packets aren’t an injustice – they’re a reward

Controversy over generous pension arrangements for executives means we risk throwing the baby out with the bathwater.

Aaron McKenna

THERE WAS A rather pointed attack on meritocracy during the week, when an ESRI report on private sector pensions for top earners was used as a stick to beat anyone with the audacity to do well and earn well.

The report pointed out that the top executives in some of Ireland’s most successful companies receive pension contributions in their pay that are 36 times greater than for the average worker in monetary terms; or five times higher in percentage terms.

Pensions have been a hot topic in the past few weeks: The Irish Times published a report indicating the ludicrous cost of ministerial pension pots were they to be funded in the private sector. In return we heard politicians getting all hot and bothered about the pensions being paid to former senior staff members in our banks, many of whom we can only surmise were part of the team that drove the banks – and our country – head first into a wall.

The pay and pensions of anyone supported by the public purse are an issue of great interest. Our politicians pay themselves and their senior mandarins too much and lash gravy onto their already-full plates with lump sum payments for their retirements if they quit or are – in the case of politicians – fired by the electorate.

Our friends in the banks have cost us a lot more than just money in recent years. Theirs is an example of how long-term remuneration – such as pensions – should be inextricably linked to performance. Though it would be near-impossible to retroactively change the terms of contracts signed years ago, in future we ought to tie bankers’ pensions to the solvency of the organisation after their time. If it needs a bailout, and actions you took led it there, there should be a clause allowing for non-payment.

Baby and bathwater

Even though we have reason to feel outraged at the money being lapped up by those with the most responsibility (or complicity) in ruining our country, there is a danger of throwing the baby out with the bathwater in terms of extending our Schadenfreude towards those doing well in the private sector. This is visible in the reaction to the ESRI report from Professor Gerard Hughes.

Headlines and stories around the report talked of company chiefs lapping it up while the average worker slaves away. The average executive of a stock market listed company in Ireland has a salary of €396,000; received pension contributions akin to 26 per cent of salary from the company, or €100,000 per year; and would retire on a pension equivalent to €199,200 per year. This versus the state pension of €11,962 or the average pension of a worker in one of these companies (after seven per cent contributions from the company, which amounts to €2,700 per year in work) of €18,000 per year.

The subtle undertone of the comparison is not difficult to miss. The ESRI report’s author is looking for some of the tax reliefs given to private sector pensions to be done away with, and choosing to focus on the limited selection of very top earners is a good way to engender support for – effectively – increasing tax on a much wider band of people who earn good money.

Fair and square

These are private sector companies, doing well and rewarding their executives for delivering a profit and – in the process – creating jobs and wealth. I’d advise any company to link pay to performance in the short or long term, but whatever way they choose to reward their employees – top and bottom – is entirely down to them. It’s their money that they earn fair and square.

Pension contribution becomes a bigger element of remuneration, the more a person earns. These people are successful and we already push them to take their talents elsewhere with tax rates that mean they work half the day for the Minister for Finance.

Stripping out tax reliefs on pension contributions is just another tax increase on people who already pay 50 per cent income tax.

The argument is, of course, that those who can afford more should pay more. Interestingly, many news outlets – including this fine one – focused on the gross monetary value of the additional pension contributions rather than the percentage difference. Thirty-six times more pension contribution sounds more impressive than five times in percentage terms. To apply this to tax, the person earning €396,000 earns 11 times more than someone earning the average salary of €36,000; but is paying 25.6 times more income tax.

The nature of the proposals being put forward doesn’t even hit the highest earners alone. The proposal to stop reliefs at a fund of €600,000 sounds impressive, but would cap pension contributions. One pension expert, speaking to the Irish Independent, pointed out that public sector pensions – let alone private – would be effectively capped at €13,800 per year before punitive taxes kick in.

We need private industry

A better solution would be to cap reliefs based on the value of the pension that a person would get, not the gross size of the fund; and it would be wrong to make this a small figure to speak to a populist dislike of people who do well and earn well in the private sector.

If Ireland is to recover, we need private industry to lift the economy. Already we see multinationals finding it difficult to move executives to Ireland because of our comparatively high income tax rates on high earners; and our own homegrown crop can easily move elsewhere – where they can keep more of what they earn whilst still contributing a fairly large shake to the local government.

We shouldn’t be swayed by pejorative language that makes anyone who is successful out to be a leech on the average worker. These people help create jobs for all and opportunities for anyone with enough skill and perseverance to climb the ladder.

Yes, there are major issues with the pay and conditions of bankers and politicians. But the money they earn is sapping directly from your emergency room or the Garda barracks down the road.

The money private sector executives earn is for the work they do to create wealth and jobs, which will ultimately play a role in saving this country from its economic malaise.

Aaron McKenna is a businessman and a columnist for TheJournal.ie. He is also involved in activism in his local area. You can find out more about him at aaronmckenna.com or follow him on Twitter @aaronmckenna.

Read: More columns from Aaron McKenna on TheJournal.ie>

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