Article: Maximum pay limit: An idea whose time has come?

Compensation & Benefits

Maximum pay limit: An idea whose time has come?

High executive compensation remains a controversial issue, and the comments of a high profile British politician have evoked strong emotions once again
Maximum pay limit: An idea whose time has come?

British opposition leader Jeremy Corbyn touched a chord with many in his country and across the globe when he articulated his support for a maximum wage cap. To be fair, this is not the first time Left-leaning politicians and economists have mooted the idea, but coming from someone as senior and influential as Corbyn it gathered considerable public interest. 

He was speaking with reference to the ‘sort of’ radical actions that were needed to address the growing income inequality in the UK. “I would like there to be some kind of high earnings cap, quite honestly,” he told BBC Radio 4ís Today program on 3rd January. “I think the salaries paid to some footballers are simply ridiculous, some salaries to very high earning top executives are utterly ridiculous. Why would someone need to earn more than £50m a year?” Corbyn stated. 

The new global economic order has clearly led to income inequality levels never seen before in history: in America, the proportion of after-tax income going to the top 1% doubled from 8% in 1979 to 17% in 2007. In Britain, in 2004 the average earnings multiple for FTSE 100 companies was 94, meaning the highest paid staff earned 94 times that of the average worker in the com-pany. By 2014 that figure had soared to 150. 

According to the Harvard Business Review, most CEOs worldwide earn between 50 and 100 times more than the average worker. The CEO-to-worker pay ratio in America is even bigger, at 350:1. The future looks worse, because manufacturing and productivity driven jobs are showing a decline, and Tech giants such as Google and Amazon are enjoying market shares “not seen since the late 19th century, the era of the robber barons” in the words of the editors at The Guardian. What drives popular support for Corbyn is the fact that astronomical salaries have not always led to ethical behavior on part of many CEOs. The origins of the 2009 financial crisis made that amply clear. What was worse — and this was the factor that led to calls for increased regulation — was the fact that many of the erring CEOs managed to get away with their golden parachutes while the people lower down in the hierarchy bore the brunt of pink slips and mass layoffs. 

The new global economic order has clearly led to income inequality levels never seen before in history

Criticism of Corbyn’s statement was quick to come. Tim Worstall from the Adam Smith Institute in London called it a “terrible idea”. His argument was straightforward- “So, what happens when you do place a maximum earnings cap on an economy? Those who bump up against it simply stop working.” He further states that - “a maximum wage, a maximum income, will curtail pro-duction and thus consumption — it will make everyone poorer…”

 The assumption of course, is that quite a substantial number of “productive people” will hit the maximum wage limit. In practical terms however, it is only a microscopic minority of top execu-tives and celebrities who would probably hit such a pay ceiling. And CEO productivity itself is a very fuzzy concept. Tim Worstall offers no explanation of how CEO salary caps will influence their or the company’s productivity. 

At a deeper level of course, Worstall’s criticism is based on the age old question of what moti-vates people to work. Beyond a certain level, how much does pay influence behavior? A 2016 AON white paper “Why Work” based on interviews with CEOs with annual pay exceeding 10 million dollars revealed that the real motivations of CEOs were a sense of duty to others, per-sonal enjoyment, a desire to create impact and to reinforce their sense of identity through their work. Pay, if anything was simply an “unfiltered marker of success” that was often used to measure themselves against their peers.

So, wouldn't a pay cap then allow these CEOs to focus on the elements at work that are truly meaningful? Would it not offer a sense of equity to the masses of workers on the factory lines or in office cubicles? Would it not release much needed funds to offer greater benefits and social security to all employees- both permanent and temporary? Would it not allow the board to be more open to voluntary investment in activities related to Corporate Social Responsibility and philanthropy? 

Answers to these questions would offer a more nuanced insight to the implications of Jeremy’s Corbyn’s still radical idea, an idea whose time may come soon enough. 

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Topics: Compensation & Benefits, C-Suite

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