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

No bio, some books worth reading – The Rational Optimist: How Prosperity Evolves – Matt Ridley .

Crisis Economics: A Crash Course in the Future of Finance -Nouriel Roubini, Stephen Mihm