The role of managers in the public sector is fundamental and can be decisive for a country’s future. That is why their salaries need to be competitive with those offered by the private sector. They do not necessarily have to be exactly the same, but they should not be significantly lower either. Otherwise, there is a real risk that the most capable and qualified professionals will choose not to work for the state.
This is one of the lessons that can be drawn from Baldo Sansò’s firsthand experience in Venezuela under Hugo Chávez. At the time, Sansò was a senior adviser to the Ministry of Energy and Petroleum, playing a key role in managing crucial issues such as nationalizations. He is also a co-founder of Driving Change.
His experience was recounted by Sergio Luciano in the book Missione impossibile, published by Edizioni Piemme. Here is his account.
Let’s start with the context: how did Venezuela arrive at the decision to pay public-sector executives poorly, while also appointing people who were poorly qualified?
When Chávez came to power in 1999, he faced two contrasting realities. On the one hand, the state was relatively weak, with a small, underdeveloped technocracy whose members were poorly paid, although it still retained a minimum level of functionality, activity and expertise.
On the other hand, there was a private sector that had effectively held the reins until then, because it was essentially responsible for distributing the country’s wealth to the population. That wealth belonged to the state and came from oil. However, since the state was unable to distribute all that money directly to Venezuela’s 30 million people, it had to rely, in one way or another, on private companies to redistribute it.
As a result, private companies were able to negotiate increasingly advantageous terms for this redistribution. In other words, they retained a growing share of the wealth, leaving less to be redistributed.
How did Chávez decide to respond?
In this context, Chávez confronted the private sector, telling companies that they had to lower their demands and renegotiate the economic terms under which they redistributed the state’s wealth on its behalf.
Take milk production as an example. Private companies asked the state for subsidies to produce milk, and the state would then tell them that they had to sell it at a lower price.
In other words, a renegotiation had begun over the terms under which the private sector redistributed the wealth generated by oil.
The private companies refused to accept the new terms. They therefore tried to remove the person negotiating with them, attempting a coup d’état. In fact, there were three different coup attempts, but none succeeded.
How did Chávez react?
At that point, Chávez realized that he could no longer rely on private companies to redistribute wealth, because he was effectively giving money to people who wanted to remove him from power.
He was therefore driven to propose redistributing wealth directly through the state, and he launched a major nationalization campaign. He significantly expanded the size of the state by acquiring Venezuela’s main companies, including major service providers and industrial businesses that had previously been privately owned.
Through nationalization, these companies became state-owned, allowing Chávez to redistribute wealth directly. His aim was to make them effective and efficient, and to ensure that they cost the state less than they had under private ownership.
How did he try to achieve this goal?
Chávez had to rely on a technocracy that was already limited in size and expertise, as I mentioned earlier. But that was not all. He also needed to recruit a large number of new senior managers to run the nationalized companies. In doing so, he relied on people who lacked the skills needed to manage the state’s expanded operations.
After completing the nationalizations, Chávez failed to recognize that a fundamental element of his revolution was the ability of the public-sector executives responsible for making it work.
He therefore confused a technical issue with a political one.
Of course, he was operating in the context of something close to a class struggle, because Venezuela’s bourgeoisie had repeatedly tried to remove him through various coup attempts. He felt under attack and did not trust them.
In such circumstances, for any politician, loyalty becomes more important than efficiency. Chávez urgently needed people he considered loyal, or at least people he did not regard as enemies.
Society began to divide between those who had money and were relatively well-off, who tended to oppose Chávez, and those who had little money, who tended to support Chavismo.
So, paradoxically, Chávez did not trust qualified managers?
When someone had been educated at American universities, Chávez tended to be suspicious. He probably assumed that such a person was liberal, neoliberal, right-wing, or something along those lines.
Instead of choosing someone competent, he tried to appoint people who posed no political risk, even if they were not the most capable candidates.
Because of this political need to ensure loyalty, he assigned positions of enormous responsibility to people who lacked the necessary skills. Yet they could have been both competent and loyal. Why not?
There was also another, more ideological dimension to the issue.
What do you mean?
Chávez embraced the idea of the “new man,” whom he believed to be a good person. In his view, the new man was not selfish, was not driven by money, and did not aspire to become rich or accumulate material possessions.
He said he did not want to promote these values in Venezuelan society and wanted to do away with materialistic incentives.
As a result, he did not make it a priority to ensure that Venezuela’s technocrats enjoyed a high standard of living comparable to that of the middle and upper classes.
In fact, salaries were miserable. So who would accept a job for a miserable salary? Not a capable and honest person. A capable and honest person certainly would not work for such low pay. They want to provide for their family and live as well as they can.
Instead, important positions were consistently entrusted either to incompetent people or to dishonest ones, and often to people who were both.
So much for the “new man”…
The state filled up with people who were, in fact, the most old-fashioned and selfish people imaginable. They were highly susceptible to corruption because, on the other side of the divide, there was Chávez’s potential political enemy: the private sector.
Private companies continued to take money out of the state and retain a substantial share of the country’s wealth. This time, however, they did so by negotiating with a weak state from a position of strength.
They were no longer directly responsible for distributing the wealth, but they negotiated very favorable terms for themselves because the state’s institutional and professional capacity to resist their interests was extremely weak. It was therefore easy for private interests to prevail.
Was there an alternative?
In my view, Chávez’s alternative would have been to retain the employees of private companies after nationalizing them and motivate them to understand that they would no longer be working for the private sector, but for the state, which had now become their owner.
For many of them, that could even have provided an additional source of motivation.
Is there a particularly clear example of this?
When we negotiated the acquisition of Electricidad de Caracas, the equivalent of Enel in Italy, its president was Venezuelan. The owner was an American fund, AES Corporation.
Fortunately, the president, who had previously always been an American, was Venezuelan: Julian Nebreda. He was a talented young lawyer who had studied at Venezuelan and American schools and universities and had worked at the Inter-American Bank.
He was a capable technocrat who had become president of Electricidad de Caracas. He felt a strong sense of belonging to his country and, during his time as president, had done some excellent work for the Venezuelan community.
Once we had acquired the company and it had become state-owned, if Chávez had appointed Nebreda as president and allowed him to continue in that role, I am sure he would have performed even better than he had for the American fund, AES, which is an entirely impersonal entity.
I believe this is an example of how things could have worked.
It would have been enough to maintain his existing financial conditions, or even reduce them slightly. Reasonable conditions would have been sufficient. I am sure he would have accepted a pay cut in order to work for the Venezuelan state.
But if he had been offered a miserable salary, no one of his caliber would have accepted the job. Only people with other motives for taking the position would have been willing to do so.
In short, if Chávez had retained a substantial part of the private companies’ workforce when he acquired them, things could have been very different. To do so, of course, he would have had to respect and maintain the financial conditions employees had enjoyed when the companies were privately owned.
I believe that, in that case, the state would have been much stronger in its dealings with private companies and much more effective overall.
How much were these incompetent officials paid, compared with what capable executives should have earned to stay in their jobs and perform well? Could the Venezuelan state have afforded to pay them properly?
The president of Electricidad de Caracas earned approximately $150,000 to $200,000 a year. I believe that the president appointed by the Venezuelan state after it became the owner of the company earned less than $20,000.
It is absurd, but there is something important to bear in mind.
In the book about my experience, Missione impossibile, written by Sergio Luciano, I describe the story of Electricidad de Caracas’s bonds, which were renegotiated after the Venezuelan state nationalized the company.
Through my intervention in that transaction, I managed to save at least $300 million to $400 million. That was a very significant amount, but it represented only half of the total. The other $400 million could not be saved.
So, if the president of Electricidad de Caracas earned $200,000 a year, that amount was negligible compared with the money lost because of the incompetence of the person running the company.
Public-sector salaries are insignificant compared with the impact those employees can have on public finances. A bad decision can cost billions, whereas paying someone a fair salary does not even amount to millions.
That is why, in my view, paying public-sector executives well is always worthwhile.
Have you seen other cases outside Venezuela in which public-sector mismanagement caused losses far greater than the savings achieved by paying officials less?
This happens constantly in all weak states. It is only natural.
You cannot compare a private company with the best human resources, who are highly paid, well trained and highly capable, with a public administration staffed by underpaid and insufficiently professional employees.
You cannot, because the private sector will always win.
Take banks, for example. Banks employ some of the best bankers, who earn hundreds of thousands of dollars. They have to deal with a ministry official earning $30,000 to $40,000 a year.
It is no contest. It is like putting Cassius Clay in the boxing ring with a flyweight.
It is always an unequal contest, and one that ultimately costs the state a great deal.
I believe the right approach would be to reduce the size of the state, employ fewer people, and make sure they are more capable and better paid. That would create a stronger, more competent and more cost-effective state, one capable of generating greater value.
Do you believe this argument also applies to Italy? Between 2011 and 2025, a €240,000 annual salary cap was imposed on public-sector executives. It was subsequently removed last year after the Constitutional Court declared it unconstitutional. Salaries are now once again linked to the remuneration of the First President of the Court of Cassation, which stands at €311,000.
Of course it applies to Italy, too. I consider the salary cap a major mistake.
It is all demagoguery. It is what Chávez did, although he took it to an extreme by talking about the “new man.”
Governments in Italy and elsewhere also want to tell the public: “We do not pay high salaries; we are not enriching ourselves.”
But that is merely demagoguery, because in the end it costs more, much more.
We need the best managers, supported by a training system that develops professionals who want to work for the state, feel attracted to public service and take pride in working for it.
Working for the state has two important advantages.
First, the work itself is extremely rewarding. People know that when they work for the state, they learn more and are exposed to a wider range of issues because there are so many different things to do.
The world is much broader when you work for the state than when you work in the private sector, where you are generally confined to a narrower, microeconomic field. Working for the state allows you to learn more, see more and have a much greater impact across a wide range of areas.
From a professional development perspective, therefore, working for the state is certainly more stimulating and rewarding.
The problem is always money.
Public-sector salaries are often very limited. Then the time comes when you need to take out a mortgage and buy a house. You may also want to buy a nice car, and perhaps play golf, if you can.
Public officials should be able to afford these things. To make that possible, the state must try to pay its employees at rates comparable to those offered by private companies. If matching private-sector salaries exactly is not possible, public-sector pay should at least come close.
Only then will the state be able to attract the most talented and capable professionals.