Friday, May 15, 2009

Now Legislate a Maximum Wage!

The ongoing economic turmoil and the meltdown in the financial world have revealed the negative effect of the excessive “compensation” packages for bosses, Fred Goodwin CEO of RBS being the most infamous of them. All the main political parties talk about having better regulation of a corporate sector that paid itself vast bonuses for destroying the financial system. A few thousand—not enough!—protestors angrily descended on the bank of England, but British Trades Unionists lobbied Parliament for a higher minimum wage. In Britain, on All Fools Day, 1 April, we celebrated ten years of a legal minimum wage, set up by the New Labour government in one of its few sensible and useful policies. Yet, the minimum wage always remains too low to live on adequately. Set a minimum wage and the spread of wages above it simply extends, they rise to match. One way to counter it is to set the minimum as a proportion of the wage bill, instead of a fixed amount. Thus the Council of Europe set its decency threshold at 60% of net earnings. So increasing the range automatically raises the minimum. There is a danger then of a self sustaining wage inflation setting in. But this suited Blair. It kept the labouring classes silent while Blair occupied himself with bigger schemes in partnership with his neocon chum, Bush. What is needed now is a maximum wage! This is professor Gregor Gall’s proposal. He explains the notion of maximum wages is based on the idea that no matter what job a person does and no matter how many hours they work, no one’s skill, expertise, intelligence or experience can justify the payment of 100, 200, 300 or even 400 times the wages of the lowest paid worker in any organization. The only way executives’ astronomical salaries can be explained is that those who receive them steal from those that end up being the low paid of the organization. In February, President Obama floated the idea of a national cap on US executive salaries at $500,000 where state bailout money has been taken. In Britain, it would plainly mean the banks, but it should mean all organizations that receive public money—bosses of train operating companies, defense contract companies, local authorities, national health trusts, universities and so on. Such reformed executive salaries could also be tied to genuine performance measures under which an executive is only entitled to the full salary by performing above a certain line. Maximum wages would be based on a ratio of around 1:4 to 1:10, where the multiplier would be based on the lowest paid in the organization. These could be determined by law. By fixing a wage range, senior managers who want to increase their own pay, have to increase that of lower paid employees automatically to fit the rules. Ordinary people who can see the injustice of the unlimited managers’ salaries can see how this reform would deal with it. But if it was only maximum wages, bonuses would not be included, and if it was just salary, then other items like expenses would be exempt. We’d soon find greedy executives awarding themselves perks and benefits on top of their wages. Such creativity as they had would be devoted to devising endless avoidance schemes, just as these people find “legitimate” tax avoidance schemes. So the notion of maximum wages needs to cover all forms of remuneration. But there’d also be a need for transparency to make sure that the rules set by law were being adhered to. It would mean everything in the books must be open, so that employees as well as shareholders could understand fully the company's finances. So, trades unions ought to press for policies along the lines of a maximum wage, knowing that most people would see it as fair. It does not stop genuine talent, merit or success being rewarded, but transparently and not excessively though regulation. It also gives people at all levels a real incentive to achieve and do better, because they cannot just steamroller self indulgent packages to the detriment of others in the company and the nation simply to feed their own greed. No one therefore need feel hard done by. The rules apply to everyone equally. A salary range from a minimum to a maximum linked in some fixed ratio means financial reward comes from the position people achieve in the range, and that has to be worked for.

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