Worth It

By Emily Pickrell

When Mexico City shop assistant Eva Maria Tatemura first heard that her newly elected president planned to cut his salary in half, she felt a spark of hope. Maybe change really was coming to Mexico’s corruption riddled government. After all, as Tatemura, who earns about $200 a month, said, “In Mexico, most citizens think that becoming a politician is a better deal than winning the lottery.” 

Mexican president Andrés Manuel López Obrador, who was sworn into office December 1, captured Mexico’s imagination and won a landslide victory by promising to take on corruption and excess. Shortly after being elected, he announced he would take a 60 percent pay cut as president, earning roughly $72,000 a year. 

Skeptics, including the country’s political class – many of whom will also see their salaries reined in – question whether the pay cut will benefit Mexicans. A price cut for the president, they warn, could mean a competence cut for the government itself. 

The debate launched by López Obrador’s announcement echoes a longstanding one across the border: whether executive pay in the United States is too high. Granted, there are huge differences in the two frames of reference. In Mexico, public officials are some of the highest wage earners, while in the United States, executives in the private sphere are the ones most likely to earn top pay.

Yet on both sides of the border, in both sectors, the fundamental question is the same: What, exactly, should an essential leader be paid? Are high salaries needed to retain top talent, or do they just ensure the hiring of executives who know how to earn them? As it turns out, the answer for Mexican politicians is deeply influenced by the answer in U.S. businesses.

In the United States, one of the first factors in setting executive salary is gauging the competition, said Harry Jones, an attorney with Littler, a human resources legal firm. “In formulating a CEO salary offer, a board of directors for a company will always want the compensation committee to ensure that the pay is commensurate with a peer group,” he said.  

The next challenge is putting a price on the extra talent a CEO brings, said David De Angelis, an assistant professor of finance at Rice Business. This benefit, known in compensation lingo as the marginal productivity of talent, can be astonishingly expensive – yet still in the company’s best interest to pay. 

“If I am a bit more talented, the small difference in talent will induce a huge change in the productivity,” De Angelis said. “Even if there is a small difference in talent, it may result in a large difference in compensation because the sums are so big.” 

To determine if this talent difference has paid for itself, though, companies need to accurately measure the performance of one individual leader. In the U.S. for-profit sector, De Angelis said, this is often done by comparing how a company’s stock price fares against that of its rivals, a metric known as benchmark performance.

But benchmarking fails to explain why compensation has skyrocketed in the U.S. in the last generation. In 2017, for example, the average CEO of an S&P 500 company earned $13.9 million – more than 360 times the salary of an average worker, according to the Economics Policy Institute. The ratio is more than ten times what it was in the late 1970s, when CEOs earned about 30 times what an average worker made, and a 70 percent increase over the stock market in the same time period.

“If you were to pick a country to be a CEO in, it’s America. But if you were to pick a country that has had a top economic performance in the last generation, it would not be the U.S.,” said Jeff Hauser, executive director of the Revolving Door Project at the Center for Economic and Policy Research. “The overall compensation of your top employees in America is radically disproportionate to comparable peer industrial CEOs in other wealthy countries.”

Using compensation committees and boards of directors to determine executive pay is a major flaw in the U.S. formula, human resources attorney Jones said. That’s because boards of directors are typically selected by other executives, who indirectly benefit from this approach. Because boards tend to overlap throughout the corporate world, they rely heavily on a small cadre of compensation firms to formulate pay packages.

“The same consultancies are designing a package that gets used again and again,” Jones said. “And the boards end up interlocking – they know each other to the point where there is a groupthink when it comes to salary.”

The same circular logic has been replicated in Mexico, said Oscar Urgateche, an economics professor at the National Autonomous University in Mexico City. While Mexican politicians don’t receive Wall Street-level salaries, they’re still very highly paid, even in comparison with Mexico’s private sector. Mexican politicians’ salaries are typically double or more those of elected officials in other Latin American countries, ranging from about $200,000 to $300,000 in a nation where the average wage is about $6,000 a year. 

But without these high salaries, defenders argue, Mexico’s best leadership talent would go to organizations such as the World Bank or top U.S. companies. Like defenders of top executive salaries in the United States, they say the key factor is scarcity. 

“The high-ranking Mexican sector compares itself with the U.S. private sector – that’s why those levels of salaries are possible,” economics professor Ugarteche said. “Their argument has always been that if they don’t earn that much they will go to the U.S.”

But Lopez Obrador, he adds, is right to maintain that candidates for public service should have a more philanthropic focus than a focus on personal compensation. Government employees bent on maximizing their salaries, he argues, may be less qualified for their jobs because their focus on society will be skewed. And according to Urgarteche, a decrease in salary for public officials might actually change the nature of those attracted to serve. 

“The current salary justification is a colonialist way of thinking – that only U.S.-elite trained politicians have any value,” Urgarteche said. “My impression is that you will get younger people who are better related to their own country and who want to work in Mexico for the Mexican government. That will produce a closer relationship between citizens and the government.”

Manuel Molano, assistant director of the Mexican Institute for Competitiveness, is more circumspect, arguing that López Obrador should focus on what his government can deliver – and that his and other political salaries should reward competence, not selflessness. 

“It is in the interest of the state to pay the bureaucrats handsomely,” Molano said. “If you are paying less than market rates, you are going to get people with less talent. You don’t want the assets of the government in the wrong hands.”

At a time when Mexico’s corruption ranks close to that of Papua New Guinea, however, López Obrador’s reduced salary may be most significant as a down payment on his promise to work for his country’s future and not his own. “In Mexico, a corrupt politician will not only leave office as a millionaire,” Eva Maria Tatemura said from the shop where she works. “He will secure enough wealth to set his family up for the next three generations.”