Against a High Pay Commission

Compass wants the government to set up a High Pay Commission to limit top incomes. This is a bad idea. It’s an example of what Boffy, in another context, rightly calls the Left’s “debilitating reliance on statism.”
The thing is, high salaries lie along a spectrum. At one end, there are genuinely talented people who might be lost to the country if their wages are capped. Some of these might not be  obviously overpaid: Cesc Fabregas (pbuh), for example, earns a third less than Frank Lampard. At the other extreme are pure rent-seekers, who owe their riches to the ability to climb corporate ladders or to the fact that they are in positions to rip off workers or shareholders.  And there are many between these two poles - people who are good but not £1m a year good.
However, a blanket cap on salaries cannot distinguish between all these different individuals. Which gives us a problem.
If the cap is set low enough to hit rent-seekers, oppressors and exploiters, it risks driving away genuinely productive people. And if it’s set high enough to retain the latter, it’ll leave the power-grabber untouched.
There is, though, an alternative to a government commission - workers’ control. Workers, far more than any ragbag of state-appointed “experts”, have an idea whether their high-paid bosses are clueless gobshites or genuinely good managers. And they have an incentive to distinguish between them. Rational workers would want to retain a talented manager, as he is best able to secure their jobs and improve their wages. And they have every need to get rid of the bad boss, as it’s their jobs that are threatened by his greedy incompetence.
So, high pay should be curbed (or not) not by the state but by workers themselves.
In this sense, I agree entirely with Paul - collective action is better than state intervention. As long, that is, as we recognize that what’s needed is not workers’ pressure upon companies, but worker’s control: workers should hire bosses, not (just) bosses hire workers.
Another thing: other opponents of Compass’s idea, such as Tom Harris or David Aaronovitch, argue that taking money away from high earners would have “minimal” or “negligible” effects on the macroeconomy. This is true, in terms of the cash sums involved. But it misses the point, that it is the unrestrained power of bosses that does economic damage. Constrain their power, and the money will take care of itself. Of course, we wouldn't expect a New Labour lackey or an ex-Communist to appreciate the dangers of inequalities of power.

Comments

[Matthew Sinclair]

"[T]hey have an incentive to distinguish between them. Rational workers would want to retain a talented manager, as he is best able to secure their jobs and improve their wages. And they have every need to get rid of the bad boss, as it’s their jobs that are threatened by his greedy incompetence."

Substitute "money" for "jobs" and you could say the same for shareholders. Obviously, the difference you're hinting at with the preceeding sentence is that workers might have better knowledge of what goes on at the company than shareholders do, lower information costs.

Wouldn't there still be the same free rider problem, though, as workers would want to leave fights with bosses (who would have power the same way politicians do - after being selected by a majority of workers) to the other workers? Rationally, they might just keep their head down.

In the present system, ultimate authority doesn't reside with bosses but with shareholders. The principal agent problems that stop that working don't dissapear with your proposal, though, do they?

You would mitigate the problem with lower information costs but might make it worse as there would still be inequities of power within the workplace and there would be no external check on misbehaving managers able to bully individual workers that try to hold them to account and use that threat to keep the mass in check.

Also, can this policy be implemented without significant infringements on the worker's individual liberty?

After all, the first rule for investing is to diversify and most people have a lot of wealth tied up in their future earnings. People who invest in the company they work for can lose their jobs (and take a hit to their future earnings) and their investment if it goes under. That's why I think there should be ethical concerns over attempts, which lots of big companies make, to get junior staff to invest in the company they work for (it's different for senior people who should take a hammering if their company goes under). Your plan would require this on a massive scale as workers would need to own all of a company's capital.

Wouldn't the smart thing to do, even if given such a stake, be to sell it? That way you've diversified your investments and face less risk to your permanent income.

Of course, if you're right, the social interest could be that the workers don't sell their stakes. Does that mean you would force people to keep shares in the company they work at?

[Fausty]

Unfortunately, Obama is embarked on the same course.

the G8/20 decide to institute in all countries, the socialists will claim that we won't lose our brightest to overseas markets because they won't have anywhere to go.

What's galling about this is that governments around the world allowed banks to become too big to fail, gave them guaranteed government/taxpayer backing and deregulated them. If that wasn't a recipe for disaster, then I don't know what is.

Now they're blaming Capitalism for the failure. It is looking increasingly likely that socialists don't want to let a good crisis go to waste.

[kardinal birkutzki]

"Workers, far more than any ragbag of state-appointed “experts”, have an idea whether their high-paid bosses are clueless gobshites or genuinely good managers"

I'd agree that it's difficult to see an outside agency being competent in this role but I'm afraid that you may be overestimating the "workers" judgement on such matters; I can't really see that there's much concrete evidence for this. Certainly, after having worked in finance since the mid 80s, I've seen no anecdotal evidence that the bank workers were able to judge a bad manager before such time as the boss/es had been proved strategically and tactically wrong and, when people did have a bad vibe about management, it was normally based on a character clash with the previous ethos of the company and largely unreliable.

In Germany, of course, there is some "worker" participation in the make-up of companies' boardrooms. Yet even when working there I saw no concrete evidence that the workforce made a judgement on anything morethan whether they liked someone's face.

i' m afraid to say there probably is no magic bullet and will end up drifting on in the same fashion in the future as we have in recent years.

[Liam Murray]

What judgements could relatively junior employees sensibly make about the commercial talents and wisdom of senior executives?

More here: http://www.liammurray.co.uk/2009/08/bad-idea.html

[BenP]

Wise and talented senior executives who brought or underwrote sub-prime MBS's for example?

[Liam Murray]

Ben P - I don't think you're following my point.

I'm not arguing that these individuals are always 'wise and talented' - far from it and I acknowedge as much in the post I link to above.

I'm saying that junior workers don't have sufficient information, knowledge or experience to determine whether or not they are. Chris's point is essentially a corruption of the 'efficient market' argument applied to employees - the irony being in it's original form he would be the first to point out the failings with that theory (access to all info, rational vs altruistic behaviours etc.)

[Claude]

"So, high pay should be curbed (or not) not by the state but by workers themselves."

I mean, come on now. And ideally a lot of other things. Realistically, that's impossible. As if the call centre workers at Barclays or BT would be made to count for shit.

Something more tangible and realistic could be a cap on the differentials between top and bottom staff at a company.

[Frederick]

If a company really wanted to pay someone a load of cash, couldn't they just employ them from another country, say, Ireland, and they then would spend a certain number of days in London?

And anyway, doesn't the idea go against the European Union laws on competition as they refer to labour?

[charlieman]

Bruce Schneier discusses a related concept in a piece called Self-Enforcing Protocols at:
http://www.schneier.com/blog/archives/2009/08/self-enforcing.html

When I worked on my final year group project at university, marks were assigned according to how members of the team valued others' individual contribution. I was the absolute slacker in the team, contributing fewer hours but providing more comprehension and new ideas. My contribution naturally generated the least share of marks, but if my colleagues had ignored my thoughts there would have been fewer marks to distribute.

That's the problem with any form of internal assessment: those who seem to do the most activity can be over rated.

If you are going to give workers a vote about the performance of their boss, it has to be on their previous record (change cost versus revenue) rather than hypothetical improvements.

[Rick]

Just who are 'the workers' anyway?

In an investment bank, and that's the high pay problem that most concerns the government at the moment, many of 'the workers' are rent-seekers too. Analysts and traders often don't manage people but they manipulate the system as much as their bosses do and they all collude with each other in doing so.

In your worker-controlled utopia, who is going to hold these people to account? The security guards and post-room staff?

[Alex]

Rick has it exactly right. This is about pay in the financial sector, and the workers themselves are also participating in the party. And the reason to regulate banker's pay is that one of the many failings that led to this current crisis, is the moral hazard that comes from pay/bonuses in banks being linked to short run success. So Fred can make RBS the largest bank in the world, take a fat pay check, then watch it crash to the ground because his irresponsible policies made RBS' growth unstable. That's the issue here. Bankers' pay needs to be linked to the long term stability of the bank.

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