Economic Management
CEO/Employee Pay Ratio
This is a hotly discussed issue of late. The ratios can be high with public company CEO’s being compensated an average employee’s annual wage within the first day of a year’s work.
Some argue this is a sign of a breakdown of society as the share of society’s output going to chief executives is rising far faster than the overall income of society and definitely faster than the compensation to employees.
This imbalance, these might claim, leads to depressing consumer demand and social unrest.
Others argue this is an example of market forces at work and highly qualified and successful people must be retained by employers or lose out to competitors, both at home and abroad.
The imbalance, these others might argue, may well right itself over time, but in the meantime in a world short of talent, this is the cost of remaining competitive.
I do have questions that I have not yet seen anyone express an expert opinion on.
Whereas a great many chief executives are also on boards of directors of not only their own employers but on boards of directors of other competing employers, might this argument of “let the market decide” not be somewhat self-serving?
Don’t we have, in effect, chief executives making decisions about not only the compensation of other chief executives, but about chief executive compensation levels generally?
Furthermore, don’t these chief executives move among employers, from chief executive post to chief executive post within that relatively small cohort?
Do chief executives move internationally and experience the same pay ratios in all developed countries? If not, do those countries with reduced pay ratios have less successful executives with lower returns to shareholders, lower market shares, lower innovation and lower productivity? If not, why not?
So why is this not a case of a skewed market wherein chief executives and members of boards of directors are sitting on both sides of the bargaining table at the same time, in effect, at least indirectly in conflict of interest in negotiating compensation for chief executives?
As we see in the resources below, shareholders, securities regulators and securities exchanges, along with the general public, are all taking an interest in this issue, most particularly in the aftermath of the financial meltdown of 2007/2008.
Governance is interesting isn’t it.
Mike Klein
Resource links:
http://www.forbes.com/sites/halahtouryalai/2013/08/27/how-wide-is-your-wage-gap-new-rule-would-reveal-ceo-pay-vs-employee-pay/2/
http://www.bloomberg.com/news/2013-09-17/ceo-to-worker-pay-ratio-disclosure-proposal-to-be-issued-by-sec.html
http://www.economist.com/blogs/graphicdetail/2012/05/ratio-ceo-worker-compensation
Wednesday, January 22, 2014
Wednesday, January 15, 2014
Spectrum Auctions and Consumer Advocacy
Economic Management
Spectrum Auctions and Consumer Advocacy
Needs
Canadians see need for expanded coverage area with fewer and smaller “dead” zones for mobile phone and data service.
Canadians see need for greater data transmission capacity within the available mobile phone and data service areas.
Government Initiatives
One federal government proposition is that holding spectrum auctions enhances competition to better serve consumers with mobile phone and general Internet service.
Another federal government proposition is that new rules governing contracts between mobile phone providers and users will improve access to service area coverage.
Background
We need to note the differences between bandwidth spectrum and geographic area service bars.
Bandwidth spectrum refers to the number of frequencies that can be used to carry data. For instance, the AM band has a range of numbers representing frequencies within that band, the FM and UHF bands likewise each have a spectrum from lower frequency to higher frequency within each defined band. Then there is the microwave band and other bands.
These signals may be airborne, wire-borne or glass fibre-borne. The infrastructure may include above ground lines with poles, underground lines, towers and satellites. A set of copper paired cable phone lines may carry multiple bands and glass fibres can easily carry multiple bands, each with multiple frequencies within each band.
Service areas I have referred to as geographic area service bars are areas in which mobile or cell phones characterize signal strength by number and/or size of service bars. Having no service bars means there is no signal strength, therefore no service.
Bandwidth is only meaningful where there is service. Where there is no service, there is also no bandwidth.
Government Initiatives
Bandwidth Spectrum Auctions
Auctions are intended to deliver goods and services to the highest bidder. So the Government of Canada is proposing to follow the example of the US government in raising revenue by selling authority to use regulated bandwidth to mobile phone and data transmission service providers. The revenue would go to the (presumably) general funds of the Government of Canada and provide funds to deliver government services to the people of Canada. The highest bidder notion is supposed to maximize that revenue.
Provider Service Contracts
The Government has initiated change to limit contracts, particularly for mobile phones. Thus contracts can now be no more than two years and the terms of terminating a contract, where for instance a subscriber moves to an area not served by the initially contracted provider, are eased.
Each of these initiatives is proposed to improve service and reduce costs to consumers.
Situation
Competition
Canada’s mobile phone service is almost totally provided by three dominant long established providers; Telus, Bell, Rogers. These and other legacy telecoms have long ago installed the physical infrastructure that supports our phone and data transmission services. These include wires, towers, satellites, microwave systems, undersea cables, routers etc.
These are businesses that must at least recover their costs to remain viable to provide service at all. Ideally from their perspective, they are businesses that buy low and sell high or at least buy and then sell at a mark-up.
These three providers, we are told by Government of Canada advertising, do not provide complete coverage for all parts of Canada. The providers’ argument against providing complete coverage is that both the capital and the operating costs of doing so are too high to be sustainable,.
Verizon and other very large international service providers are not interested in entering Canada because the costs of serving a relatively small population over a large area are prohibitive. Small service providers face the same prohibitive capital startup costs and must compete with the three much larger established providers, each with a large subscriber base. This means the threshold for new providers to enter this market is considered to be too high to make entry a reasonable business proposition.
Capacity
Bandwidth can be a real resource when the communication infrastructure is in place. Authority to use yet to be built bandwidth is a completely artificial resource. Simply having authority to use a nonexistent resource is not a guarantee the resource will be made available and subsequently used. In fact, one of the purposes of buying authority is to keep competitors from using the bandwidth to which the authority applies.
Bandwidth is more than a concept, it is real physical infrastructure enabling electronic, digital communication. Bandwidth requires knowledge and capital to be put into place. Canada’s three major providers have overlapping bandwidth infrastructure that enables them to serve subscribers unique to each in the same geographical area. So the major population areas have at least three choices of bandwidth to access. There is nothing stopping me, for instance, having three separate service contracts at my one physical address, each with its own physical infrastructure. Of course I would have to pay for the use of each of these three through three separate contracts. The three providers must earn revenue for the service they provide, no matter how many other providers are covering the same area.
As an aside, my guess is that the actual costs of these services are higher because of three sets of infrastructure than would be the case would the providers share space on a single capital and operating cost of a single physical infrastructure.
Conclusions
So what about the Government’s proposition? Did the government achieve any of its stated objectives? Did we benefit by those achievements?
Increased Competition: The same three established predominant providers are the only ones who can justify buying authority to use bandwidth. So now we have three dominant providers in a position of greater dominance by having exclusive use of greater bandwidth. In fact, the purchasers now have the legal authority to keep other providers out of certain bandwidth capacity.
Therefore, no increased competition and no benefit to us.
Increased Competition to Lower Cost to Consumers: The same three dominant providers control the space, but with increased capital costs, the costs of bandwidth licenses. They must get a return on those bandwidth authorities by charging cost plus margin to users. The cost to users must rise or we lose even those three dominant providers to bad business economics.
Therefore no lowering of cost, in fact, a raising of cost to users.
Bandwidth Authorities as Benefit to Consumers:
The revenues raised by bandwidth auction definitely goes to Government revenues and can replace tax revenues that might otherwise have to be paid by consumers. However, it seems clear that the providers must charge more than they paid, thereby costing consumers more than the government revenue raised through the bandwidth auctions.
Therefore no net economic benefit to taxpayer-consumers.
Unmentioned Impact on Canadians
Bandwidth Auctions as Income Transfer Policy
The investors in the three dominant providers buy access to increased consumer spending by buying the bandwidth use authority. That enables the transfer of money (income redistribution) from every Canadian bandwidth user, filtered through the corporate structure of the three providers, to the investors in those three providers. So, the Canadian treasury is indeed at least indirectly being used to transfer income from the many to the few by creating an indirect tax on consumers, a tax on providers that must be passed on to consumers after being marked up.
Improved Access to Competition as Portrayed in the Government Advertising
The Issue: Security of Supply of Service
So the nice lady (in the ad) drives into a non-service area and is frustrated by the lack of service. Will the sale of bandwidth to the three providers improve her situation? Will the government’s policy of enabling termination of contract to allow and enable start of a new replacement contract with another provider help this nice lady?
Well let’s look at her situation. She apparently had service up the point in her trip where she did not have service. Supposedly another provider will offer service in that “dead” zone. So, does that other provider offer service in the “live” zone she just left? We don’t know. It seems the nice lady would need to terminate and start contracts every 500 metres or so, with each contract being at the normal rates of such contracts, including the new charges to cover the cost of purchasing bandwidth. We have no assurance the newly purchased bandwidth authority will add bandwidth to the service, nor do we have any assurance that the new bandwidth authority will improve area coverage, leaving fewer “dead” zones.
In fact as already discussed, new bandwidth is only meaningful where there is service, but does not add more service area. There are the same number of “dead” zones. It seems likely these dead zones will remain dead longer as the provider companies have had to devote expensive capital to purchase of bandwidth licenses instead of adding coverage areas.
So What Was The Point?
Service Contracts
The nice lady standing in for all of us is meant to understand that the Government of Canada served her interest by making it easier to remove an unwanted contract, thereby making her more willing to return the party in government to power in the next election. The government did, after all, attempt to respond to consumer frustrations with this initiative without committing to government expenditure.
Maybe the government can impose, as market interventionist governments might do, rules that allow contracts to terminate and start as we make our journeys across Canada through automation. Without the ability to more easily switch contracts among providers, there is little point to the new initiative.
However, in the practical reality of mobile phone and mobile data service, it seems technically infeasible to switch providers at will to simply achieve greater area coverage.
It therefore seems this impractical solution is not actually helpful to the nice lady.
Capacity
The word “competition” in bandwidth auctions might have Canadians thinking the government was reducing costs and improving services by adding bandwidth competition to the service mix. Again, the nice lady might be convinced to return this party to power.
But what if she notices as previously discussed that her costs have actually risen and her security of supply has not improved?
Seems this initiative was actually not helpful to the nice lady and in fact worked against her interest.
Suggestion
Perhaps the Government of Canada could demonstrate real leadership by installing bandwidth and service coverage for all areas of Canada as an infrastructure to be made available to all and any phone and data transmission service providers.
The threshold for entry into the mobile phone market could be reduced to next to nothing, thereby actually making it possible for many providers to enter the market as opposed to raising the threshold to keep other providers out through bandwidth auctions.
After all, we the taxpayer-consumers are going to have to pay for it all no matter how it’s presented to us. At least this way the providers can design their services to respond each in its own unique way to consumer needs without having to devote all that development capital to simply crossing the threshold of entry into the market.
Possible Outcome
The bandwidth would physically exist.
The service area coverage could be expanded.
The lowering of cost to each provider and thereby to each of us could be accomplished by having each provider use only its allotted bandwidth(s) on that infrastructure common to all.
Additionally, the high capital cost of providing at least three redundant physical infrastructures may be avoided, therefore making a stronger business case for coverage in every area of Canada, no matter how remote.
Mike
Spectrum Auctions and Consumer Advocacy
Needs
Canadians see need for expanded coverage area with fewer and smaller “dead” zones for mobile phone and data service.
Canadians see need for greater data transmission capacity within the available mobile phone and data service areas.
Government Initiatives
One federal government proposition is that holding spectrum auctions enhances competition to better serve consumers with mobile phone and general Internet service.
Another federal government proposition is that new rules governing contracts between mobile phone providers and users will improve access to service area coverage.
Background
We need to note the differences between bandwidth spectrum and geographic area service bars.
Bandwidth spectrum refers to the number of frequencies that can be used to carry data. For instance, the AM band has a range of numbers representing frequencies within that band, the FM and UHF bands likewise each have a spectrum from lower frequency to higher frequency within each defined band. Then there is the microwave band and other bands.
These signals may be airborne, wire-borne or glass fibre-borne. The infrastructure may include above ground lines with poles, underground lines, towers and satellites. A set of copper paired cable phone lines may carry multiple bands and glass fibres can easily carry multiple bands, each with multiple frequencies within each band.
Service areas I have referred to as geographic area service bars are areas in which mobile or cell phones characterize signal strength by number and/or size of service bars. Having no service bars means there is no signal strength, therefore no service.
Bandwidth is only meaningful where there is service. Where there is no service, there is also no bandwidth.
Government Initiatives
Bandwidth Spectrum Auctions
Auctions are intended to deliver goods and services to the highest bidder. So the Government of Canada is proposing to follow the example of the US government in raising revenue by selling authority to use regulated bandwidth to mobile phone and data transmission service providers. The revenue would go to the (presumably) general funds of the Government of Canada and provide funds to deliver government services to the people of Canada. The highest bidder notion is supposed to maximize that revenue.
Provider Service Contracts
The Government has initiated change to limit contracts, particularly for mobile phones. Thus contracts can now be no more than two years and the terms of terminating a contract, where for instance a subscriber moves to an area not served by the initially contracted provider, are eased.
Each of these initiatives is proposed to improve service and reduce costs to consumers.
Situation
Competition
Canada’s mobile phone service is almost totally provided by three dominant long established providers; Telus, Bell, Rogers. These and other legacy telecoms have long ago installed the physical infrastructure that supports our phone and data transmission services. These include wires, towers, satellites, microwave systems, undersea cables, routers etc.
These are businesses that must at least recover their costs to remain viable to provide service at all. Ideally from their perspective, they are businesses that buy low and sell high or at least buy and then sell at a mark-up.
These three providers, we are told by Government of Canada advertising, do not provide complete coverage for all parts of Canada. The providers’ argument against providing complete coverage is that both the capital and the operating costs of doing so are too high to be sustainable,.
Verizon and other very large international service providers are not interested in entering Canada because the costs of serving a relatively small population over a large area are prohibitive. Small service providers face the same prohibitive capital startup costs and must compete with the three much larger established providers, each with a large subscriber base. This means the threshold for new providers to enter this market is considered to be too high to make entry a reasonable business proposition.
Capacity
Bandwidth can be a real resource when the communication infrastructure is in place. Authority to use yet to be built bandwidth is a completely artificial resource. Simply having authority to use a nonexistent resource is not a guarantee the resource will be made available and subsequently used. In fact, one of the purposes of buying authority is to keep competitors from using the bandwidth to which the authority applies.
Bandwidth is more than a concept, it is real physical infrastructure enabling electronic, digital communication. Bandwidth requires knowledge and capital to be put into place. Canada’s three major providers have overlapping bandwidth infrastructure that enables them to serve subscribers unique to each in the same geographical area. So the major population areas have at least three choices of bandwidth to access. There is nothing stopping me, for instance, having three separate service contracts at my one physical address, each with its own physical infrastructure. Of course I would have to pay for the use of each of these three through three separate contracts. The three providers must earn revenue for the service they provide, no matter how many other providers are covering the same area.
As an aside, my guess is that the actual costs of these services are higher because of three sets of infrastructure than would be the case would the providers share space on a single capital and operating cost of a single physical infrastructure.
Conclusions
So what about the Government’s proposition? Did the government achieve any of its stated objectives? Did we benefit by those achievements?
Increased Competition: The same three established predominant providers are the only ones who can justify buying authority to use bandwidth. So now we have three dominant providers in a position of greater dominance by having exclusive use of greater bandwidth. In fact, the purchasers now have the legal authority to keep other providers out of certain bandwidth capacity.
Therefore, no increased competition and no benefit to us.
Increased Competition to Lower Cost to Consumers: The same three dominant providers control the space, but with increased capital costs, the costs of bandwidth licenses. They must get a return on those bandwidth authorities by charging cost plus margin to users. The cost to users must rise or we lose even those three dominant providers to bad business economics.
Therefore no lowering of cost, in fact, a raising of cost to users.
Bandwidth Authorities as Benefit to Consumers:
The revenues raised by bandwidth auction definitely goes to Government revenues and can replace tax revenues that might otherwise have to be paid by consumers. However, it seems clear that the providers must charge more than they paid, thereby costing consumers more than the government revenue raised through the bandwidth auctions.
Therefore no net economic benefit to taxpayer-consumers.
Unmentioned Impact on Canadians
Bandwidth Auctions as Income Transfer Policy
The investors in the three dominant providers buy access to increased consumer spending by buying the bandwidth use authority. That enables the transfer of money (income redistribution) from every Canadian bandwidth user, filtered through the corporate structure of the three providers, to the investors in those three providers. So, the Canadian treasury is indeed at least indirectly being used to transfer income from the many to the few by creating an indirect tax on consumers, a tax on providers that must be passed on to consumers after being marked up.
Improved Access to Competition as Portrayed in the Government Advertising
The Issue: Security of Supply of Service
So the nice lady (in the ad) drives into a non-service area and is frustrated by the lack of service. Will the sale of bandwidth to the three providers improve her situation? Will the government’s policy of enabling termination of contract to allow and enable start of a new replacement contract with another provider help this nice lady?
Well let’s look at her situation. She apparently had service up the point in her trip where she did not have service. Supposedly another provider will offer service in that “dead” zone. So, does that other provider offer service in the “live” zone she just left? We don’t know. It seems the nice lady would need to terminate and start contracts every 500 metres or so, with each contract being at the normal rates of such contracts, including the new charges to cover the cost of purchasing bandwidth. We have no assurance the newly purchased bandwidth authority will add bandwidth to the service, nor do we have any assurance that the new bandwidth authority will improve area coverage, leaving fewer “dead” zones.
In fact as already discussed, new bandwidth is only meaningful where there is service, but does not add more service area. There are the same number of “dead” zones. It seems likely these dead zones will remain dead longer as the provider companies have had to devote expensive capital to purchase of bandwidth licenses instead of adding coverage areas.
So What Was The Point?
Service Contracts
The nice lady standing in for all of us is meant to understand that the Government of Canada served her interest by making it easier to remove an unwanted contract, thereby making her more willing to return the party in government to power in the next election. The government did, after all, attempt to respond to consumer frustrations with this initiative without committing to government expenditure.
Maybe the government can impose, as market interventionist governments might do, rules that allow contracts to terminate and start as we make our journeys across Canada through automation. Without the ability to more easily switch contracts among providers, there is little point to the new initiative.
However, in the practical reality of mobile phone and mobile data service, it seems technically infeasible to switch providers at will to simply achieve greater area coverage.
It therefore seems this impractical solution is not actually helpful to the nice lady.
Capacity
The word “competition” in bandwidth auctions might have Canadians thinking the government was reducing costs and improving services by adding bandwidth competition to the service mix. Again, the nice lady might be convinced to return this party to power.
But what if she notices as previously discussed that her costs have actually risen and her security of supply has not improved?
Seems this initiative was actually not helpful to the nice lady and in fact worked against her interest.
Suggestion
Perhaps the Government of Canada could demonstrate real leadership by installing bandwidth and service coverage for all areas of Canada as an infrastructure to be made available to all and any phone and data transmission service providers.
The threshold for entry into the mobile phone market could be reduced to next to nothing, thereby actually making it possible for many providers to enter the market as opposed to raising the threshold to keep other providers out through bandwidth auctions.
After all, we the taxpayer-consumers are going to have to pay for it all no matter how it’s presented to us. At least this way the providers can design their services to respond each in its own unique way to consumer needs without having to devote all that development capital to simply crossing the threshold of entry into the market.
Possible Outcome
The bandwidth would physically exist.
The service area coverage could be expanded.
The lowering of cost to each provider and thereby to each of us could be accomplished by having each provider use only its allotted bandwidth(s) on that infrastructure common to all.
Additionally, the high capital cost of providing at least three redundant physical infrastructures may be avoided, therefore making a stronger business case for coverage in every area of Canada, no matter how remote.
Mike
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