Fund managers investing over the long term should take note of pay gaps between senior management and employees.
At least, this is the implication of a report from MSCI that found that companies that pay top executives far more than they pay their rank-and-file workers tend to be less profitable over the long term compared to other firms with narrower wage gaps.
The consumer staples sector is estimated to have the highest intra-corporate pay gap globally; in the US the highest gap was seen in the consumer discretionary sector.
Both sectors are likely to be highly impacted by calls for adjustments to minimum wages in certain countries, said MSCI, which has produced a report called ‘Income inequality and the intracorporate pay gap’.
MSCI says a “tragedy of horizons” is in effect in which companies respond to – and are paid for managing – immediate performance, like maintaining dividends, share buybacks, and quarterly earnings.
“This short-termism tends to treat labour as a cost to be minimised rather than an asset to be utilised over long time frames,” the firm says.
Noting that income inequality has increased in 63% of countries in the world from 1980 to the current decade, MSCI also said that between 2009 and 2014 average profit margins were higher for companies with lower intra-corporate pay gaps across all sectors, except materials.
On average, labour productivity was lower for companies with higher intra-corporate pay gaps during the study period.
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