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Introduction of stock
options and low taxation on capital incomes have
caused a swift and sharp widening of the income gap
Helsinki (09.11.2011/edited 09.11.2011 - Timo-Erkki Heino*) For a long time after World War
II and up until the mid-1990s Finland was often described as "a moderate
society". But
then came an abrupt change. Income inequalities, which had slowly been
diminishing during this period,
started to increase rapidly.
Before the mid-1990s the incomes of the CEOs of
Finland's
biggest companies from ordinary employees averaged 14 times the average
income of the workers at the
same companies. After 1995 the CEO income averaged 31 times that of the
workers. If the mobile-phone company Nokia, by far the biggest and one of
the most international of the Finnish companies, is included, the incomes of
the CEOs averaged 110 times the income of the workers.
At the top of the CEO-income ladder was the CEO of the Nokia Corporation,
Mr.
Jorma Olllila, with an annual income of over 50 million euros in 2000. And
at
the height of the IT-boom Mr. Ollila's income was over 2,400 times the
income of an ordinary Nokia worker in Finland. For anyone willing to do the
sums on this it turns out that it
took four hours for Mr. Ollila to receive the equivalent of an ordinary
Nokia worker's annual income.
The roots for this income divide can be traced back to two decisions taken
during the early 1990s' recession and banking crisis.
In 1993 the centre-right government introduced the so-called dual income
taxation. This meant that earned income, wages and salaries, continued to
be taxed progressively, which for top earners was rather high. However,
capital income, i.e. income from stock or share dividends and capital gains
etc., were
taxed at a very low flat tax rate of 25 per cent.
The result is that an ordinary worker, for example someone working in a
paper mill and earning annually 33 000 euros, pays proportionally more
in taxes than a shareholder or someone who has invested in stock and who can
expect to receive millions or even tens of millions in
capital income.
The dual taxation system naturally provides strong incentives for those of a
capitalist inclination to declare their income as being capital income
rather than earned income. Clearly, this is not an
option open to salaried and wage earners. For those who are in a
position to decide for themselves which kind of income it is that they
receive it provides an ideal opportunity for income shifting and tax avoidance. In
Finland it is not uncommon to have small entrepreneurs with a million or two
million euros in capital income courtesy of stock dividends and zero euros
as earned
income.
The second reason for the mid-1990s' great divide was the introduction of
stock options as compensation or bonuses for CEOs and top management in
Finnish companies, in keeping with practises elsewhere around the world. In
1993, as a prerequisite for EU (or then EC) membership, the
ownership of Finnish companies was opened up to foreign owners also. It has
been claimed that these foreign owners, US pension funds for instance,
demanded stock options for top management. However, it has also been claimed
that the demands of the foreign owners also provided an ideal pretext
used by top management and compensation consultants for getting stock
options
approved.
When it comes to Finnish listed companies the boards of directors are 90
percent composed of present or former CEOs of other companies, who in
their own companies have or had enjoyed stock options schemes. And
naturally, they favour stock
options in the companies where they are now currently directors also. The
general annual
meetings nominally deciding on the stock options are in Finland, as in many
other countries, rubber stamps with "the old Soviet-style elections" to coin
a phrase used by a former US SEC commissioner. This is a structure or
culture designed to
making stock options a more normal and acceptable feature of business life.
This research on CEO and worker incomes was done for the Finnish PSB
television documentary "Work, Income, Stock Options" in five big Finnish
listed companies: Nokia (mobile phones), UPM (paper), Fortum (energy),
Konecranes (cranes) and Nordea (banking). Finland is one of the few
countries where this kind of study can be carried out when taxable incomes
are public information.
Read also:
*Timo-Erkki
Heino worked at the Finnish Broadcasting Company YLE from the early 1970's
until 2011 producing investigative documentaries on economics. - In 1994 and
2011, he received the Public Information Grant (the Finnish equivalent of
the Pulitzer prize) for his documentaries on South Africa and on economic
policy. - In 1997, 2002 and 2011, Timo-Erkki Heino received the annual award
of the Association of Investigative Journalism in Finland.
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