Writing in today's Guardian, Andrew Simms - Policy Director of the New Economics Foundation - argues that the time has come to cap salaries, noting that:
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.
We know now all too well how destructive are the forces of seeking profit and pay maximisation for their own sake. Another benefit emerges of capping high pay or setting a maximum ratio between highest and lowest paid: beyond that level, an executive's performance has to be judged against achievements other than personal accumulation. So, instead of status derived from higher incomes, the desire to excel can instead be directed toward the social contribution and environmental performance of the bank or company involved.
You can read the rest of Andrew Simms' piece here.
3 comments:
Three random points, not related to each other but all in response to Mr Simms article.
There is a ten-minute bill waiting its second (and final, one suspects) reading in the London House of Commons to set a maximum wage.
I note the ratio of 10-to-one cited by Simms. On that basis, the lowest grades in the Irish civil service need an increase.
AB Atkinson recently published a working paper on "Concentration among the Rich" in which he used a ratio of 30 times the mean income (since that would, at the typical target interest rates prevalent a few years ago) yield the mean income as interest). And from that, he defined the super-rich as having an income of 30x30 times the mean, etc. Is it possible to get the picture of the situation in Ireland (distorted though it might be by our tax exiles who need only declare they spent the requisite number of days out of the country to avoid being liable for tax here).
I blogged this on Slugger O'Toole. Initially I thought it was a very good idea, but then...
Won't this prevent companies from expanding and result in less job creation? If the maximum salary that can be awarded is some function of the lowest, isn't there a strong disincentive not to hire people on low salaries (e.g. graduates)?
If a company goes through a phase whereby it doesn't hire graduates for a number of years, the lowest salaries in the organisation will rise as workers move off the entry level and the highest executive salaries will rise as a function of that.
But, were the company to hire graduates again it would necessitate reducing executive salaries back down as a function of the entry-level salary.
Won't this prevent companies from expanding and result in less job creation? If the maximum salary that can be awarded is some function of the lowest, isn't there a strong incentive not to hire people on low salaries (e.g. graduates)?
I know these are short comments in a blog and not in-depth analysis, but I offer two comments on Mack's point:
(a) It could work the other way and act as an incentive to raise the pay of the lower-paid workers in the firm.
(b) I am wary of arguments that make points only on employment and don't assess the quality of that employment, and in particular the pay associated with it. (The other situation where the impact on employment has been raised recently is the minimum wage.) Why, in a developed western economy, do we have or tolerate low-paid work in the first place? If the two office cleaners in my workplace disappeared for three weeks, we would be much more discomoded than if the CEO disappeared for the same amount of time.
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