Maximum wage :- Relate executive pay to that of the least well paid?

In the Guardian Andrew Simms has been arguing in favour of a setting a maximum wage as a function of the lowest wage within an organisation.

One of the fathers of modern banking, JP Morgan, believed that to motivate people you didn’t need a ratio of more than 10 between the highest and lowest paid. This is common knowledge in management school, but seemingly ignored in the workplace.

This would create two good incentives

#1 It would create an incentive to pay all workers in the organisation as well as possible, as the ability of a senior executive to award themselves a high salary depends on the earnings of the lowest paid worker in the organisation (and would prevent shareholders simply pocketing the difference as profit, as would be the result of an absolute maximum wage).

#2 It would create an incentive to ensure the organisation consistently performs well, as the ability to pay high wages to your workers is a function of how well the organisation is run in terms of revenues and non-wage costs. (This contrasts with paying out bonuses based on stock performance and the like).

Some potential flaws

#1 It would create an incentive to outsource lower-paid work, to keep the lowest salary in the organisation high

#2 It may create an incentive for companies to stay smaller than they otherwise would, if expanding meant hiring lower paid workers – resulting in less new jobs created. (Imagine a company that has not hired graduates in a number of years – as the newest employees climb the ladder executive pay expands, but by hiring new graduates at graduate salaries executive pay must be reduced. A pretty big incentive not to hire or grow).

A salary cap for everyone

Hat tip – progressive economy

  • Tipster

    There is a bill on setting a maximum wage before the House of Commons in London, due for its second stage (and final, one presumes) debate in October. (http://www.publications.parliament.uk/pa/cm200809/cmhansrd/cm090603/debtext/90603-0004.htm)

  • Nomad

    Paul Krugman skirts around this issue in ‘Conscience of a Liberal’, however his point is that as a people (he refers to America, but the point is as valid in Western Europe), we have lost our sense of outrage. It used to be this that would be the cap for officers salaries, pay too much and it was awful PR. Now people are numb and don’t care as much.

    I prefer outrage to an artificial mechanism that would be just yet another wall to climb for all but the least adventurous corporations (see also: tax evasion).

  • cynic

    Ah isnt it great to see socialists thrashing about thinking what elese they can do now they have lost the political argument.

    Sorry guys but this will never happen outside Cuba

  • Mack

    Cynic –

    I wouldn’t be so sure. A very high top rate of tax is effectively the same thing as an absolute maximum wage & we’ve been there before. Even the USA has had painfully high top marginal rates in the past.

    If it weren’t for some of the disincentives it also creates I’d have thought enforcing some sanity in executive pay via Andrew Simms’ suggestion would be to the benefit of shareholders / company owners.

  • Nomad

    Cynic,

    Bring on the labels. I love seeing those who consider themselves to be on the right still using the S word as a weapon, while public services break down, society is stretching apart to the point of tearing, and deficits grow to shocking levels.

    Ironically, many on the ‘left’, just want to see a return to similar tax levels as under Reagan. (Although given how long America’s top individual income tax rate was 91% from after 1964 for many years, it would be amusing to see what the ‘right’ of this generation would do if that was suggested).

    Also Cynic, just what political argument has been lost? In the midst of “The Great Recession” following years of low regulation, low taxes and super high executive compensation it seems a very strange time to be saying something like that.

  • cynic

    “society is stretching apart to the point of tearing”

    ….errr where exactly is that happening?

    The argument that has been lost is that the state and state regulation can do it any better. People just dont buy that. They have seen how inefficent and wasteful the state is and how it squanders their money to buy votes.

    Even where people want what they call ‘fairness’ its by moving those at the bottom up, not capping and levelling down.

  • willis

    I very much enjoyed reading “The Black Swan” recently. It pointed out that some pursuits have the capacity of returning massive rewards to a relatively small group of people – film stars, footballers, authors, etc.

    To a certain extent we accept these massive rewards because they can almost seem random. I certainly do not begrudge JK Rowling her riches, given that she really created them all out of her own head.

    I think one area where cynic and I might agree is the use of low pay or no pay internships as a way of ensuring that the less well off have a barrier to professions like Finance, Accountancy, Law and now Journalism.

    The problem as always is the Golden Rule

    “Those who have the Gold make the rules”

  • Mack

    Willis –

    I’d also recommend “Fooled by Randomness”

    It pointed out that some pursuits have the capacity of returning massive rewards to a relatively small group of people – film stars, footballers, authors, etc.

    It also shows that 99% of those who compete in those arenas lose out. Probablistically, he reckons you’re better off trying to make a living in mediocristan rather than extremistan if you can 😉

    To be honest, I was thinking of capping wages of the most senior employees, rather than the earnings of those who took the risk of setting up the companies in the first place (also inhabitants of extremistan). The pay structure at many modern corporations incentives the wrong things, and Nicholas Taleb himself argues it played in role in generating the current crises…

  • Mack