[andy popp]

It's also about risk, if you've made a large capital investment, borrowed money to set up and manage, run and grow a business then you deserve the rewards.

No. You're talking about entrepreneurship, classically defined, and I don't think many people would argue that there shouldn't be a return to entrepreneurship. But the problem really lies in the corporate sector where CEOs etc are not entrepreneurs; they are managers. In formal terms they are agents of the principles (the shareholders who own the firm) and they are supposed to act only in the interests of those principles. This is the basis of shareholder models of capitalism.

Lets go back to an earlier point. Inequality has grown massively in the last twenty years - a period of huge economic growth. Thus, some sections of society have been able to capture a much larger share of the fruits of that growth. Either we just accept that this represents a fair reflection of the various contributions different actors make to that economic growth (eg. Fred the Shred fully deserved his massive payouts) or we ask questions about the ability of certain classes to capture returns for themselves.

One explanation of that paradox lies in the so-called Principle-Agent problem, which argues that agents are self-aggrandisers who will look to their own interests rather than those of the principles (shareholders, which is actually most of us through pension funds etc.) Corporate governance is meant to align the interests of principles and shareholders but corporate governance has either been shockingly lax or has been repeatedly trampled underfoot (see Enron), Worldcom, Tyco etc ad nauseum). So, for example, supposedly independent remuneration committees are actually stuffed with non-execs who are your mates and you sit as non-execs on their remuneration committees etc. Top management teams have in effect been able to set their own levels of pay with often only the losest relationship to performance.

Sloper talks about capitalism as though its some monolithic, homogenous system whereas in fact this problem is much more pronounced in the so-called Anglo-Saxon system (the UK and the US). There are other economic systems that are fully capitalist but also produce much more even distributions of wealth (Scandanavia and Japan spring to mind, so wages differentials in Japanese corporations are much narrower than in US equivalents for example). The question doesn't have to be capitalism vs socialism - this is a false dichotomy designed to close off the argument - but between competing models of capitalism.

[GCW]

The suggestion was that the maximum pay in a company (or sector I suppose) shouldn't be higher than 10x the average wage in that company.

You'd have to exclude your own salary though.

If you got a management job in a company with 10 people earning 10k, you could get 100k. 
But then the company would have 11 people and the average would be £18,181 so the next year you'd maybe get £181,818.
Then..... ad infinitum.

Although there's nothing to say you would get a pay rise, but there's potential there.

[Monolith]

We figured pop stars/ artists would be excluded as they are paid whatever someone is prepared to pay for their work. Footballers, however, are on a salary so would be included.

So Cashley would very suddenly be at the mercy of Ferral?

[Sloper]

The problem in the corporate sector, where as you say the people on the big salaries are not the start up investors, is differential.

Mangers are and almost always will be paid more than the staff that they manage, salary being a consequence of the responsibilities of management and to denote 'superiority'. 
Would you want to take on more work, more stress, greater responsibility without some extra reward?  The simple answer is no you wouldn't. 

So, in large structures with multiple lawers of management and complex structures you end up with the people at the top being remunerated more than the people below them and so on; now if in this mix from the char lady to the ceo you have sales people, traders, designers and so on who create value and realise profit then their salaries will reflect this as will their bonus.  This means that you will have their managers package reflecting this and so the relationship will not be linear.

I'm not pretending that the current system is perfect, far from it; rather that the proposals mooted will probably make the poorest worse off, demotivate those in the middle and make no difference at all to the people at the top.

In short, a lovely lefty ideal which looks great on paper but doesn't stand up to the first breath of the harsh wind of reality.

[Sloper]

The suggestion was that the maximum pay in a company (or sector I suppose) shouldn't be higher than 10x the average wage in that company.

You'd have to exclude your own salary though.

If you got a management job in a company with 10 people earning 10k, you could get 100k. 
But then the company would have 11 people and the average would be £18,181 so the next year you'd maybe get £181,818.
Then..... ad infinitum.

Although there's nothing to say you would get a pay rise, but there's potential there.

I think that they're suggesting that the average should be modal rather than mean.  Havign said that I would imagine that in a medium size FTSE250 company the modal average would be around £20k so even with the x10 'cap' you're probably not a great deal out of step with the current salaries of FTSE CEO (although their overall package may be much higher)

[Ru]

If it wasn't the total income from the business (salary, bonus, dividend, BIK) that was taken into account then the system wouldn't work anyway. The people at the top would just take a poxy salary and the rest in dividends, Bentleys or bottles of Cristal. Sounds like a completely unworkable plan to me anyway.

I'm neither either in favour, nor against this scheme, but some of the arguments against don't make sense.

This doesn't make sense either. It's a cap on top wages, not a method of reducing bottom wages. If a director capped his wage at, say, £150k, recalculated the average wage of everyone else at £15k to save costs, all his workers would resign and work elsewhere. The company still has to operate in the jobs market. A company is already at liberty to reduce wages if it wants to, a cap on the top wage will not affect this.

[Jaspersharpe]

I don't understand your point Ru. Mine is just that it would be very easy to find loopholes by which to abuse the system. I'm in favour of the broad principle behind the idea I just can't see how it could work.

[andy popp]

With all due respect Tom, I don't think you've really engaged at all with my argument - which is not about any specific proposal but a broader one about trends in wage differentials in recent years (and not, please note, about the very existence of wage differentials. Of course they always will - and should - exist). For me, the question remains; is this widening gap a true and fair reflection of varying contributions? My answer would be no - it is far more a reflection of highly skewed access to economic power within the Anglo-Saxon system of corporate governance. It is simply not enough to say top management pay reflects a competitive labour market (the standard defence); all markets are imperfect, this one probably more than most.

I think you arguments are defeatist, drawing on some scary bogeyman of unbridled socialism. This isn't about how things COULD be different in some lovely ideal world. Things actually ARE different in some highly effective capitalist societies.

[slackline]

Mark Thomas: The Manifesto (Series 2 episode 1) (~9hrs left to listen again).

Interesting idea, you'd need to see the distribution of pay in order to judge which measure of average (mean, mode or median) is most appropriate and this will likely vary based on the size of the company.

Would certainly help curtail fat cat bank managers etc. who's pay is grossly disproportionate to their responsibility as they do pretty much fuck all as far as I can tell.

[Ru]

I don't understand your point Ru. Mine is just that it would be very easy to find loopholes by which to abuse the system. I'm in favour of the broad principle behind the idea I just can't see how it could work.

Ok, speaking broadly, there will undoubtedly be some loopholes which it may or may not be possible to iron out. I don't see that as a major problem. My point in general is that it would be possible to separate wages (which would be affected by a cap) from income from dividends or capital gains. Hence the risk associated with capital investment is still rewarded. I don't see this as an abuse of the system. Sloper's point in response, and I took yours to be the same, was that this left for the possibility for a shareholder-director to say "I'm taking a paycut so everyone's taking a pay cut" whilst keeping his own income high through increased dividends (for example). I don't think this argument works as his workers would just leave and go elsewhere. That was my only point.

[Bernard Jefferies]

Average Goldman Sachs salary is roughly £500,000 which would mean the guys at the top would be on 5 million...............clearly ridiculous

Average civil engineer 35-40k. meaning people at top on 350-400k.  This definitely isn't the case!!

Using 10x the average salary is not going to be realistic for many organisations in my opinion.  The only way you could constrain top end salaries would be to look at companies on a case by case basis.  Who would do this?! Where would all the excess money go?!

[Ru]

I thought the Goldman average took into account the top wages? Obviously you can't factor in the top wage when calculating the average or it defeats the point.

I think the idea of some sort of cap is a worthy one. The current system seems to be that those at the bottom get paid as little as possible and those at the top take as much as possible, which is inequitable. Whether the cap is worked out as 10x average or not is detail that would need much thought.

[Bernard Jefferies]

Apologies, yes you are right it must factor in the higher salaries.  But I thought this was how the average is calculated, from the salaries of every individual in the company.  Otherwise where do you draw the line? Senior management? Directors? The board? 

As you said though you would have to look at the details more thoroughly for a law to be put in place.

[Yossarian]

I completely understand people's anger re the obscene salaries of CEOs of big businesses, but on its own that's a separate argument.  What I don't agree with is the broader philosophical argument about rewarding entrepreneurship.  Forget the detail about 10x / mean / mode, etc - what this is basically saying is that someone who creates a business has some sort of enforced cap on how much he will ever get out of it.  Personally, I don't agree with that principle. 

Perhaps it's because I'm in the middle of doing exactly that I find the idea so depressing...

[Ru]

A cap on wages needn't affect reward from entrepreneurship.

[Yossarian]

Ah yes, I forgot about my hair gently turning grey...

(Wage is irrelevant in my own case - it's the dividend that matters to me...)

[Stu Littlefair]

precisely. wages does not equal dividends

And there's no need to exclude the top earners when calculating the average; just use the median and not the mean. Median salary at Goldman Sachs (US) is $100,000.

Like Rupert I think there's a strong argument to be made for some sort of cap to be made. I don't know where exactly it should be placed.

Another argument in favour that no-one has made is that the existence of very high salaries has a strong distorting effect on society because it pools all the bright talent into one area that may or may not be the most beneficial for society as a whole. Think how many bright quants from the city might have chosen to be teachers or something useful, rather than fucking up the financial system over the last ten years...

About the only argument I can see against is one that salaries need to remain competitive internationally, or the best and brightest will go elsewhere. I've no idea if that still leaves room for a meaningful cap on the highest earners, but I'll bet it does

[Yossarian]

But if you merely cap wages then all you'll create is a load of devious and convoluted loopholes...

[Stu Littlefair]

There are already a load of devious and convoluted loopholes so people take home more cash.

You can have

a) No cap, and devious and convoluted loopholes
b) A cap, and devious, convoluted loopholes.

Which do you think will do more for pay equality?

Your argument is akin to suggesting that we're bound to get sporting cheats, so why have rules...

[Jaspersharpe]

The other way of doing it would be to use the system we already have more effectively. Increase taxes on the very rich and increase tax breaks for lower earners. This would redistribute the money and mean that it would become pointless paying salaries above a certain level as you'd be giving 60, 70 or 80 percent of it to HMRC. People who earned under a certain level would pay nothing thereby increasing the worth of their salary.

It'd never catch on.......

[Stu Littlefair]

Not a bad idea. I can see one problem with it up front.

There's still an incentive to pay very high salaries because the return on them is not zero, and there is significant caché to being paid a lot. High taxes won't change this.

I wonder which would be more workable in practice. A cap is simpler to legislate and involves a lower administrative burden. Would a tax system be any harder to fiddle?

[Yossarian]

I have been arguing for total drugs freedom in the Tour de France for the last 10 years...

No, I agree with that.  But it strikes me that a plain salary cap will fail totally to reduce the effective income of any of the people any of us might want to earn a bit less in relation to anyone else, which is what the idea was in the first place. 

[slackline]

The word average should be expunged from the OED, it would certainly resolve a lot of confusion...

The are three "averages"....


(Arithmetic) Mean : Sum the individual values and divide the total by the number of data points.
Mode : The most frequently occuring value.
Median : the mid-point between the two extremes of the observed values.

For data that follows a Gaussian/normal distribution (bell-shaped curve) these are pretty much identical.  When the distribution is skewed e.g. by a few highly paid earners in the context of the current discussion then these three measures start to differ and your choice of which you are calling "average" can mask the underlying data (besides which you should never consider these metrics in isolation without taking account of the variation that is observed in your data).

Can't be arsed linking to the articles on WIki

[Jaspersharpe]

Not a bad idea. I can see one problem with it up front.

There's still an incentive to pay very high salaries because the return on them is not zero, and there is significant caché to being paid a lot. High taxes won't change this.

I agree but if you crank the top rate up high enough then it should be enough to wipe out the majority of the incentive.

I wonder which would be more workable in practice. A cap is simpler to legislate and involves a lower administrative burden. Would a tax system be any harder to fiddle?

The tax system is constantly adjusted to try to close loopholes and prevent fiddling. Of course, lots of loopholes still exist and new ones are being worked on all the time but I think that a new system will be much more susceptible to fraud than one which is already established.

I disagree that there would be a lower administrative burden incurred by imposing a cap. There'd be a whole new department set up to administrate it and it would require totally new legislation to be made with no precedent to work from. Changes to the tax system are made all the time. This would just be more minor tinkering in comparison.

[slackline]

I disagree that there would be a lower administrative burden incurred by imposing a cap. There'd be a whole new department set up to administrate it and it would require totally new legislation to be made with no precedent to work from. Changes to the tax system are made all the time. This would just be more minor tinkering in comparison.

Ist that cause Payroll departments are fucking useless cnuts who can't do their jobs properly already?