ANALYSIS, Global – Salaried employees in the C-Suite being paid obscene sums of money they ill-deserve, is an inflationary disease that has spread to executives in most Western countries.
Kevin Rudd is one of a chorus of international leaders to draw our attention to this short-termism & greed as a philosophical cause of the international economic crisis.
Pay Solutions.
How can we simply link executive pay & control it? Without something as unwieldly as a black-letter figure…
Simple. The 2thinknow view is that we set executive pay based on a market capitalisation and a multiplier for salaried executives.
The employing company is free to decide pay, but pay must be under a cap.
2thinknow 40 Capped Pay.
A salaried executive can only earn a multiplier of earnings up to 40 times Award wages, in a band based on market capitalization.
The 2thinknow 40 Capped Pay would be as follows:
- Include ALL remuneration (options, allowances)
- Be based onto up to 40 (maximum) times the Award (Minimum) Wage.
- In a band based on market capitalisation. (up to 30 times in mid-size companies, 40 in large companies)
An advantage.
Award / minimum pay would then be linked to executive salaries. To raise their own pay executives would have to raise the lowest-paid workers pay.
This would create powerful incentives for more equitable pay.
(Few rational people would dispute that a qualified, educated professional should receive a Return on Investment for their education, skill & experience.)
A capped band, as 2thinknow propose, would have a profound evening effect as a market incentive.
Of course, there would need to be controls & regulation / oversight of pay to ensure salary competitiveness.
Why a 30-40 Multiplier?
Japanese companies such as Toyota or Sony have created innovative products. Products such as the hybrid Prius or Sony Walkman that create new wealth by building new markets.
In Japan, as in many European countries, statistics show executive pay is on average 30-40 times average wages.
Why not enshrine a multiplier as an acceptable level benchmark for salaried CEOs?
And in order to prevent short-termism this would undermine the concept of ‘at-risk’ pay, which has led to the credit crisis.
‘At-risk’ pay is a pretense that has led to a massive transfer of wealth from shareholders (owners of capital) to ‘professional’ management (shareholders with no risk).
‘True capitalists’ not effected
This would only apply to salaried employees, not business owners or entrepreneurs.
Most innovations occurs from business entrepreneurs such as Bill Hewlett, Dave Packard, Bill Gates, Steve Jobs, Warren Buffett. Not from salaried bank CEOs.
Further, not a single study has convincingly made the case for executive performance being linked to pay beyond a $ million a year.
Once you get beyond 30-40 average earnings you should have to risk capital to earn more. That is, become an ‘entrepreneur’, not be a salaried employee who is ‘gifted’ options.
Nowhere in core capitalist economics is it stated that salaried managers should be remunerated as if they were capital creators or owners.
Why care?
4 reasons.
- Theft of shareholder value by professional management
- Risk-taking & short-termism
- Inflationary effects of salaries
- Inflationary pricing effects on assets/services/goods
Shareholders are the capital owners, so should receive the rewards, not professional managers. This is the heart of conservative capitalism. Wage-earners are wage-earners, and do not deserve payment for capital risk.
Risk-taking & short-termism is obvious.
Finally, the presence of highly-liquid, wealthy wage earners creates distortionary effects on prices of basic goods. Your first house. A sandwich. An engagement ring. Wine. Groceries.
Inflationary Salaries
The reason? Cashed up salary earners have limited risk and lots of dollars. In places like the City in London a basic sandwich can be 2-3 times that in cities like Edinburgh, Melbourne or San Francisco.
More insidiously, second & third homes as investments for overpaid executives drive up property prices to obscene levels.A home is a home, not a high-growth investment.
Construction (largely a Cash economy item) then spreads wealth through-out the service economy leading to hidden inflation in goods & services. This is largely untraceable, as construction is mostly Cash economy in UK or Australia.
Finally, the main reason why you paid more for petrol is rich individuals (and investment vehicles) manipulating crude oil prices for a quick buck. Hedge funds especially can manipulate ‘free markets’.
In short, obscene wealth creates a price-spread between the cheapest item & the most over-priced luxury good, dragging up the mid-priced standard good.
2thinknow 40 Capped Pay.
Would lead to more equitable wealth distribution and reduce the incentive for short-termist executive manipulation of markets.
Up to 40 times earnings would reduce the moral hazard incentive to ‘privatise gains’ and ‘socialise losses’, and create an incentive to raise worker salaries.
2thinknow 40 Capped Pay. Your thoughts?
2thinknow correctly predicted the current market crisis in 2007.
Why 40 times average wages? Is this just an arbitrary figure plucked from the boardrooms of Japan or is there a specific reason you chose 40? Is it because two million bucks seems like a nice round figure for the upper end? Many specialist doctors who know nothing about marketing or hedge funds go about saving lives every day and are happy enough to get by on less than 500k.
Teachers, nurses, social workers and police officers have to fight to stay above minimum wage – they don’t benefit from this concept at all unless they have a significant share portfolio (and yes, I know their super funds will benefit but not as much as those contributing ten percent pa on a two million dollar wage!)
And as for entrepreneurs – under the current system, I can make more money as an entrepreneur selling snake oil at my casino then I can selling clean energy at my windfarm – I can make more money selling cheap booze and boob jobs than I can selling cheap vegetables and water.
We need to revamp the incentive system – maybe change the concept of “free enterprise” to “beneficial enterprise”. Government subsidies are near pointless if you can still make twice as much in a business that has zero or a negative benefit to the community.
Maybe we need a list of wage/taxation rates that more accurately reflect the benefit or otherwise to the community??
As for the number 40, I think the public service sets a fair example – the bottom end is on around 40-45k and the top is around 600k (last time I checked) – this seems like a better range. But I’m happy to meet half way and reward innovation that benefits the community, so I’ll say a max of one million per year for those good folk – so my final number is 20.
Hi Sean,
20 may indeed be a good starting point for most Australian companies. But truly global companies from Europe or Japan work up to 40 times. It’s a long-term range/average. 40 times would be an outer limit.
Australia was once around 10-13 times average earnings. 10-13 is another benchmark at the lower end.
It would need a report commissioned to be precise. Such a report could consider links to award wages. Perhaps forcing executives to raise the salaries of janitors & service workers every time they raise their own wage.
What is concerning is that money that belongs to the community or shareholders is redistributed to executives (salaried employees). This current practice is a corruption of capitalism / economics if one reads “Wealth of Nations” or derivative works.
Shareholders (capital owners) should be alone in reward for risk. CEOs should not receive $33m.
Thanks for your comment again.
Christopher Hire