High Pay – What is to be done?

More reaction to the High Pay Commission’s report, this time from Left Futures, a left-wing Labour group blog with an impressive list of contributors.

Top pay is about power not merit or value,” they say. Well, they’re sort of right. It’s not just top pay, though. All pay is, ultimately, a function of power.

Accumulated capital, positional authority and scarce skills all give people power. More subtly, as Barbara Wootton showed, so do social contacts and position in the social hierarchy – so just being a doctor or a lawyer means people make assumptions about what you should be paid, which gives you a head start. At the other end of the scale, lack of power also determines pay. Unionised workers make up for this lack of individual power with combined collective power.

This stark truth sits behind the pay and job evaluation systems we set up to give the distribution of pay a semblance of fairness. Even the grades and evaluation points are based upon criteria defined by the powerful in the organisation. Merit is simply a shorthand for whatever the top bosses want. More often than not, when job evaluation systems come out with the ‘wrong’ answer, the criteria and scoring systems are…er… recalibrated to make sure that those who are deemed worthy of higher pay get it.

So what do the folk at Left Futures propose?

Top pay could be directly and transparently related by publicly agreed criteria (not by some cosy privately arranged remuneration committee) to company performance. Okaaay….but, assuming that these criteria could be agreed in the fist place, it still wouldn’t do much to bring about a more equitable distribution of income. Many highly paid people do have their pay linked to company performance. Accountancy firms, consultancies, law firms and even some banks and other financial organisations are run by partners – so in effect the bosses are also the shareholders. They divvy up the profits from their businesses and earn huge amounts of money. OK, this suggestion might have some effect – it would curb some of the executives who pay themselves even when their firms’ profits fall - but many of the super rich would be relaxed about a law linking their pay to company performance. It would not affect their earnings at all.

Shareholders could have a mandatory say in senior pay and bonus packages. Interesting to see the left championing the cause of capital against labour but that’s by the by. Shareholders already have some say on pay through remuneration committee reports which, occasionally, they reject. However, as I said earlier this week, shareholders have proved reluctant to exercise the power they currently have and the predicted revolt against bankers’ remuneration never came. Would giving shareholders more power act as a brake on pay? In a few cases maybe but there is little evidence to suggest that it would make a significant difference.

A Royal Commission appointed, with a genuine cross-section of all key interests, to produce guidelines to evaluate relative merit uniformly across the national workforce – the inauguration of morality and equity over naked power. In effect, this would be a national job evaluation scheme! (At this point, the hearts of all HR managers reading this will be sinking.) I wonder if the person who came up with this suggestion has any idea of what would be involved. Job evaluation schemes are an administrative nightmare even in medium-sized organisations. Trying to do such a thing on a national scale would be impossible. Just coming up with these wonderful uniform definitions of merit would take years. I have a vision of endless meetings, tedious evaluation panels and teams of inspectors locked in legalistic arguments with employers for years.

An Enterprise Council, made up of representative of all the main grades of employees, could be set up in all medium-sized and large firms (say, those with over 200 employees) which would have a duty each year to open up the books, examine the company’s total debit and credit account, and in the light of this determine the incomes of each of the main grades for the next year. In other words, handing control of remuneration over to works councils. Not quite as unworkable as the previous proposal but still be fraught with difficulty. Again, defining the criteria would be a lengthy process and would inevitably lead to horse-trading between various interest groups. The pay review would become a negotiation between the employee representatives and between them and the senior management. A kind of legally forced collective bargaining.

None of these suggestions are practical or would do much to reduce the level of inequality in earnings. The authors started the post by saying that pay is about power and, in any of these scenarios, it still would be, except that the mechanisms for exercising that power would be slightly different.

To my knowledge (and I’m happy to be corrected if there is any evidence), no government has ever curbed high pay significantly through legislation. Sweden, I believe, tried it in the 1960s but with little success.

Legalistic attempts to rein in high pay would almost certainly be just as prone to loopholes and clever workarounds as the tax system. So why not just save a lot of bother and increase taxes?

If people really want to reduce income inequality, taxation is a far more tried and tested (and cheaper) way of doing so than piling on tons of extra law and bureaucracy which probably wouldn’t work anyway. Of course, any government that increased taxes too much would run the risk of rich people packing up and moving abroad but, as I’ve said before, we are still some way from that point yet. There are also other alternatives to income tax but that will have to be the subject of another post.

I’m all for a bit of innovative thinking but suggestions like a national job evaluation scheme or mega works councils are, frankly, bonkers. If left-wingers want to take a certain amount of money from the powerful and give it to the powerless (which is, or at least used to be, the left’s raison d’être), why not just start using the dreaded T-word again?

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7 Responses to High Pay – What is to be done?

  1. Pingback: High Pay – What is to be done? - Rick - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

  2. Doug shaw says:

    Pay transparency across everyone might be an interesting and useful place to start. Pay secrecy seems to benefit only employers (another way of trying to control folks, yawn), and those who think they’re overpaid. And I worry about our obsession for lower taxes all round. The principle of taxation is fine by me and I want to be a part of a society where to a greater degree the better off help the less well off. I guess a challenge is to ensure that tax revenues are spent carefully. And as some of your good work shows that is not often the case.

  3. Cogently argued and convincing conclusion.

  4. Pingback: Is High Pay really a problem? « Left Outside

  5. Luis Enrique says:

    “produce guidelines to evaluate relative merit uniformly across the national workforce”

    where to start?

    what does ‘impressive contributors’ mean when they are capabable of coming up with hooey like that?

    I really don’t know what to do about absurdly high wages. I’ve got a lot of sympathy for the idea that it became socially acceptable for people in a position to screw as much money as they can out of a position, to do so. I don’t know what levers we have to change that, but maybe what we’re seeing now (popular outrage against pay) is how things change.

    I’d just like to see more data. Is it true that everybody’s income is public info in one of the Scandanavian countries? I think it would spice up office politics if everybody else knew everybody else’s pay. You might get wage restraint to avoid mutinies. I think if more of us could say who gets paid what for doing what that could have some beneficial results:

    1. if things like popular anger are going to shame companies from giving gigantic pay awards, we need to see the who is getting paid what for what. If pay is “unjust” we need to see the injustice – and data from the extremes (top bankers) isn’t enough. I also think it might change willingness to pay on the part of customers – people might start thinking, I don’t want to pay X just so this clown can earn Y.
    2. increasing labour market efficiency – if people can see which jobs pay well, they can apply for those jobs, increase supply, wages will fall in those jobs and perhaps rise in the industries people leave, as supply falls. I know people with established careers and experience can’t switch easily, so it’ll work slowly via new entrants.

  6. Pingback: Why inequality and power imbalances still matter | Liberal Conspiracy

  7. Old Coypu says:

    I agree that none of these schemes is likely to have much effect on pay levels but I think you misunderstand these proposals. They are proposals for massive job creation schemes for the boys and girls. Jobs that would probably be ‘highly regarded’ and so highly rewarded. Sigh.

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