Fat Cats Get Fatter as Jobs Go to the Dogs

In pampering their leaders, while ordinary workers face unemployment or pay stagnation, telcos are fueling concern about the growing wealth gap and emergence of an economic elite.

Iain Morris, International Editor

June 28, 2018

14 Min Read
Fat Cats Get Fatter as Jobs Go to the Dogs

In Elysium, a 2013 science-fiction movie starring Matt Damon and Jodie Foster, the rich and powerful decamp to a luxurious space station, rather like a Sandals holiday resort in the stratosphere, while the rest of humanity clings to survival in the rotting slums of planet Earth.

This nightmare vision of extreme inequality is perhaps not as far fetched as most of us would like. Thomas Piketty, an acclaimed French economist, has identified a growing "wealth gap" between the rich and the poor. Automation threatens to make it bigger. In his award-winning book Rise of the Robots, Martin Ford frets that artificial intelligence will create mass unemployment and leave the super-rich with even more of the economic pie. Yuval Noah Harari warns of similar upheaval in his bestselling Homo Deus. (See Automation's Advocates in Downsizing Denial.)

Figure 1: Abandoning Earth A future habitat for today's oligarchs and business leaders? A future habitat for today's oligarchs and business leaders?

An analysis of pay and employment data for some of Europe's biggest telecom operators does not offer much encouragement. Of the 12 companies examined (see table below), six awarded double-digit percentage pay increases to their CEOs in the recent fiscal year. In a third of cases, the increase was more than 30%. While pay data for other staff is not as readily available, the median increase in wages per employee was just 1.9% at the seven companies that published this information.

CEO pay

Change last year

Personnel costs per employee

Change last year

Wages per employee

Change last year

BT

GB pound 2,307,000

71.5%

GB pound 51,021

4.62%

GB pound 39,972

2.88%

Deutsche Telekom

euro 4,746,650

10.4%

euro 68,553

1.14%

N/A

N/A

KPN

euro 3,848,000

43.8%

euro 86,704

-0.16%

N/A

N/A

Orange

euro 1,744,999

12.9%

euro 55,425

-0.27%

euro 39,484

0.89%

Proximus

euro 936,903

8.2%

euro 90,957

-1.12%

euro 51,154

-1.50%

Swisscom

CHF 1,868,000

1.9%

CHF 146,396

4.95%

CHF 107,968

0.58%

Telecom Italia

euro 361,000

N/A

euro 61,014

20.28%

euro 34,596

0.11%

Telefonica

euro 5,359,332

-0.6%

euro 55,917

-12.08%

N/A

N/A

Telenor

NOK 14,100,000

1.6%

NOK 412,968

20.41%

NOK 346,806

16.44%

Telia

SEK 23,485,000

0.2%

SEK 529,954

4.45%

SEK 409,626

4.52%

Veon

USD 8,374,579

63.5%

USD 23,211

25.77%

N/A

N/A

Vodafone

euro 7,984,000

32.7%

euro 49,889

-2.97%

euro 39,374

-5.13%

Operators are rewarding their leaders at the same time as they cut jobs. Staff numbers at the 12 companies fell by 26,783 in the recent fiscal year, or 3% of total headcount. And further reductions are coming. The UK's BT Group plc (NYSE: BT; London: BTA) announced plans for 13,000 layoffs, around 12% of total jobs, shortly before CEO Gavin Patterson was revealed to have enjoyed a 72% rise in compensation last year. Deutsche Telekom AG (NYSE: DT) aims to cut 10,000 jobs, nearly 5% of its total workforce, at its T-Systems unit, which sells IT services. Timotheus Höttges, the German telco's CEO, received a 10% increase in total pay last year. (See Big Telcos Have Slashed 107K Jobs Since 2015, Efficiency Drive by Major Telcos Has Claimed 74K Jobs Since 2015 and Telco Job Prospects Go From Bad to Worse and DT Will Cut 10k Jobs at T-Systems – Report.)

Staff reductions

Headcount

Cuts as % of headcount

Planned cuts

Planned cuts as % of workforce

BT

-600

105,800

-0.56%

13,000

12.3%

Deutsche Telekom

-992

217,349

-0.45%

10,000

4.6%

KPN

-255

13,275

-1.88%

N/A

N/A

Orange

-3,646

151,556

-2.35%

N/A

N/A

Proximus

-242

13,391

-1.78%

N/A

N/A

Swisscom

-621

20,506

-2.94%

N/A

N/A

Telecom Italia

-1,800

59,429

-2.94%

4,500

7.6%

Telefonica

-4,605

122,718

-3.62%

N/A

N/A

Telenor

-6,000

31,000

-16.22%

Circa 6,000

20%

Telia

-545

25,472

-2.09%

N/A

N/A

Veon

-2,056

39,938

-4.90%

N/A

N/A

Vodafone

-5,421

106,135

-4.86%

N/A

N/A

This creates a huge ethical dilemma. With sales growth proving elusive, CEOs are trying to satisfy shareholder demands for bigger profits by cutting costs. Extreme automation should help, allowing operators to generate today's revenues with a smaller workforce. French incumbent Orange (NYSE: FTE) has already acknowledged that "digitalization" renders some roles obsolete. Deutsche Telekom thinks it can save about $750 million ($869 million) in annual staff costs through automation. But the pressure from investors that drives a CEO's strategy contributes to the Elysium effect. For governments and the general public, that is disconcerting, to say the least. (See DT Targets €1.5B in Automation Savings, Misses Former Target.)

This dilemma partly explains why some industry spokespeople continue to play down the impact of automation on jobs. UK-headquartered Vodafone Group plc (NYSE: VOD), for example, insists its own investments in automation are to improve customer services and release staff for more worthwhile activities. But from the investor's perspective, those activities will be worthwhile only if they fatten margins, which means boosting sales or slashing costs. (See Vodafone Prioritizes Automation as Efficiency Bolsters Margins.)

While automation might conceivably fuel a sales increase through service improvements, the market will be skeptical. After all, most telco attempts to unearth fresh sources of revenue growth have been ham-fisted. Moreover, hardly anyone thinks operators are automating operations mainly to boost sales. During a Light Reading survey in April, just 11% of 262 respondents said this was the principal aim of automation investments. By contrast, 31% chose reducing headcount and another 29% said automation was chiefly about cutting spending on manual processes. That can happen only if operators trim headcount, slash pay or cut working hours. (See Automation Is About Job Cuts – LR Poll.)

Next page: The high life and the slums

The high life and the slums
But other telcos are more upfront. Norway's Telenor Group (Nasdaq: TELN), for instance, told analysts at the start of the year that automation and digitization would claim around one fifth of jobs by the end of 2020. If it is bolder than other European operators, it may also have the moral high ground as a fallback. CEO Sigve Brekke took a pay increase of just 1.6% last year, even though the company's share price rose by a third in Oslo. (A 16% increase in per-employee wages at Telenor was probably triggered by the divestment of a large, low-cost business in India.) (See Downsizing Telenor Pins Margin Hopes on Automation.)

Elsewhere, sharp increases in CEO compensation shine an uncomfortable spotlight on operators that are slashing jobs, especially given their lackluster performance. The most egregious example is BT. Patterson's compensation rose nearly three quarters, compared with a 3% increase in wages per employee, despite a raft of disappointing metrics. Sales fell 1%, adjusted earnings before interest, tax, depreciation and amortization (EBITDA) were down about 2% and BT's adjusted EBITDA margin of 31.6% was 0.2 percentage points lower than in the previous year. BT's share price fell 28% in London in the recent fiscal year. (See BT's Patterson Gets Tasty CEO Bonus as Troops Suffer.)

Figure 2: Overpaid and Underworked? Source: Operators, Light Reading. Note: Changes are based on comparing data from the last two fiscal years. Source: Operators, Light Reading. Note: Changes are based on comparing data from the last two fiscal years.

A sharp pay rise for Vittorio Colao, Vodafone's departing CEO, may also be hard to justify to investors as well as the wider world. Shareholders may have been encouraged by a 4.2% increase in adjusted EBITDA, as Vodafone slashed jobs and completed a merger in the Netherlands. But reported revenues fell 2.2% and Vodafone's share price was down 6%. Wages per employee dropped 5% following the divestment of the relatively high-cost Vodafone Netherlands business, now merged with Liberty Global's Dutch unit. (See Vodafone Rewards Top Brass as Thousands of Staff Are Axed.)

Change in revenues

Change in adjusted EBITDA/OIBDA

Adjusted EBITDA/OIBDA margin

Change in adjusted EBITDA/OIBDA margin

BT

-1.0%

-2.0%

31.6%

-0.2 pp

DT

2.5%

3.8%

29.6%

0.3 pp

KPN

-4.5%

-0.5%

40.8%

0.8 pp

Orange

1.2%

2.2%

31.2%

0.3 pp

Proximus

-1.6%

1.5%

31.6%

1.0 pp

Swisscom

0.2%

-0.1%

36.8%

-0.1 pp

Telecom Italia

4.2%

-2.6%

39.3%

-2.8 pp

Telefonica

-0.1%

7.0%

31.1%

2.1 pp

Telenor

-0.5%

6.6%

39.3%

2.6 pp

Telia

-5.1%

-1.5%

31.9%

-1.2 pp

Veon

6.6%

2.6%

38.8%

-1.2 pp

Vodafone

-2.2%

4.2%

31.6%

1.9 pp

Any CEO will expect to earn more if he meets targets and satisfies investors. Yet of the 12 operators examined, share prices rose for only KPN, Telenor and Swisscom in the recent fiscal year. Reported revenues fell at seven of the companies, and the median increase in the EBITDA margin was only 0.3 percentage points, despite staff cuts. Outside the investment community, public anger at fat cat pay is likely to spill over as automation squeezes people out of work.

Many governments, alarmingly, have yet to face up to the coming upheaval. Talk of a basic income guarantee is often derided as left-wing nonsense when it merits serious attention. The UK's House of Lords, an anachronistic and undemocratic institution, decided in April that fears surrounding artificial intelligence were "out of kilter with reality," a phrase that made Light Reading wonder if they were really passing judgment on themselves. (See UK Dinosaurs Decide AI Does Not Threaten Extinction.)

For all the latest news on automation, check out our dedicated content channel here on Light Reading.

Instead, it is left to the operators to warn authorities about the looming storm. Perhaps conscious of the ethical dilemma that surrounds automation, Spain's Telefónica this week urged governments to "provide adequate education and training to ensure the right to employment of individuals facing the risk of automation of many jobs as a result of the strength of the Internet of Things and artificial intelligence." (See Eurobites: VEON Trials NB-IoT With Ericsson in Moscow.)

While Patterson and Colao figure out how to spend their extra millions, Telefónica's message is one that policymakers everywhere should be giving their full attention.

A note on methodology: Light Reading used company data for wages and salaries, where available, and divided this by headcount to arrive at per-employee figures. In most cases, headcount data is for the end of the fiscal year, which may skew calculations when layoffs have occurred late in the fiscal year. The CEO pay figures include basic salaries as well as bonuses and other benefits.

For share price movements, Light Reading typically used the stock exchange or index in the country where an operator is based. The exception was VEON, which is based in Amsterdam but reports in US dollars. In that case, share price information was taken from the US Nasdaq.

Details of net income were not considered for the purposes of this story because wild swings in these figures do not always reflect underlying operational performance.

— Iain Morris, International Editor, Light Reading

Read more about:

Europe

About the Author(s)

Iain Morris

International Editor, Light Reading

Iain Morris joined Light Reading as News Editor at the start of 2015 -- and we mean, right at the start. His friends and family were still singing Auld Lang Syne as Iain started sourcing New Year's Eve UK mobile network congestion statistics. Prior to boosting Light Reading's UK-based editorial team numbers (he is based in London, south of the river), Iain was a successful freelance writer and editor who had been covering the telecoms sector for the past 15 years. His work has appeared in publications including The Economist (classy!) and The Observer, besides a variety of trade and business journals. He was previously the lead telecoms analyst for the Economist Intelligence Unit, and before that worked as a features editor at Telecommunications magazine. Iain started out in telecoms as an editor at consulting and market-research company Analysys (now Analysys Mason).

Subscribe and receive the latest news from the industry.
Join 62,000+ members. Yes it's completely free.

You May Also Like