What would happen if ...
WE CONTRAINED EXCESSIVE REWARD?
There is a growing disconnect between reward and the trifecta of effort/scarcity/risk in our society. When people can no longer see rewards attributing to working harder or working brighter (or exposing capital to more risk), we damage the very driver of production and effort in our society. We head to a very dysfunctional world where 'strive' and 'perform' become secondary concepts to 'manipulate', 'rort' and 'corrupt'. The underpinnings of the social movement toward the productive class will fail if the relationship between effort/scarcity (and capital risk) fail; increasingly frustrated dissent and disorder will arise at unjust differentials (rather than justifiable differentials that derive from working harder and working brighter).
Today, let us look at the ballooning out of the top-end of reward in our society, as has occurred over the last forty or so years, in the hope that it may inspire a resourceful investigative journalist some motivation to continue to throw light on the context and analysis of its societal implications (perhaps in preference to merely republishing propaganda from the Prime Minister's instagram showing the veritable disaster of a few specks of nappy cream on her lapel).
In the USA, The Economic Policy Institute indicates CEO compensation has grown 940% since 1978, while typical worker compensation rose only 12% during that time¹, and Otago Professor Roberts (using NZX disclosures and Statistic's New Zealand's Income survey) suggests that in NZ the incomes of chief executives (adjusted for inflation) have increased 228 per cent from 1997 to 2015, while the average worker has increased 91 per cent over the same period². In her article, Dr Roberts further indicates that in 1997 chief executives earned nine times the median worker salary, but by 2015 that ratio had increased to 17 times (with the average salary for chief executives in 2015 being $1.06m, while the average New Zealander earning $57,117). The statistics would undoubtedly be even more egregious if we were to also include the hidden indirect benefits (golden handshakes, continuing and early pension plans, share rights etc.) that are afforded to these privileged positions in both the private and public sectors. We have even witnessed spectacular reward afforded to those responsible for spectacular destruction of wealth (e.g.Fonterra's Theo Spierings $8.3m income in 2016).
So what has caused this blowout such that top-end salaries no longer bear any relativity to the criteria of effort/scarcity/risk? Why is there no effective functioning market that would normally remove such excess? While there are some intrinsic influences derived from our increasingly global context, I would suggest two major influences have allowed this unconstrained and unjustified ballooning at the top end salaries:
- The distancing of accountability through diffuse collective ownership of corporate equity
Fancy way of saying that top positions at companies not longer have their value and performance truely scrutinised when the majority of ownership has moved to collective superannuation, mutual and index-following funds.
The ownership of the capital involved is so diffusely spread (for example through Kiwisaver schemes) that immediate management accountability and evaluation is absent by the ultimate stakeholders.
Ownership meetings fail to achieve required quorums, let enough evoke sufficient overview from the ultimate owners (e.g.everyday Kiwis via their KiwiSavers funds) to call the management into review against sensible performance/reward criteria.
- The self-reinforcing feedback loop of 'global comparison' (and equivalent 'corporate comparison' for the public sector)
The top end end in USA/China/Europe gets 'X', so we need equivalent here to compete for 'global talent' (although I note that more self-constrained Japan etc. are generally excluded as precedent examples) ... and these privileged hierarchies in turn produce similar self-fulling 'comparisons' to effect a cyclic feedback, forever driving up the remuneration and widening the gap with the rest of society.
The public service similarly leverages in on the game (and away from determination of reward based on determination effort/scarcity/risk criteria) by drawing their comparison with the inflated private sector hierarchy, such that we have public officials that command (rather than 'earn'?) salaries that are twice that of the Prime Minister ofthe nation.
We already have governance at the bottom end to prevent abuse and protect societal function - a formal, legislated minimum wage constraint at the lower end of our reward scale. As a globalised society we recognise that leaving unconstrained market forces to play here would be detrimental to our society.
We desperately need an equivalent governance at the top to prevent abuse and protect societal function - an equivalent constraint to restrict the excesses which are becoming increasingly detrimental to our society, given that conventional market force constraints are not being fully exercised.
Having both constraints established (and reviewable over time) will then result in a slow re-establishing of relativities based on zero-up appraisal within those two limits; formalise the bottom of the ladder, formalise the top of the ladder, and then let the reviewed value of all roles find their own position over time within that ladder.
Whether this top end limit is expressed as a multiple of the minimum wage, median wage (or even industry-specific median wage), is worthy of discussion, as is what constitutes a reasonable multiple.
I personally believe it is best achieved by simple legislation (as per the minimum wage) rather than any complication to our existing progressive PAYE taxation system. I would suggest a multiple of, say, 20x between the lowest and highest fully paid, full-time positions would be more than adequate to allow appropriate distribution based on the variable effort/scarcity and risk associated with the various employments in our society.
The concept of constraining the explosion of remuneration at the top end is not new, and indeed unsuccessfully went to public referendum in Switzerland in 2013³ (at a multiple of 12x). The situation has only got worse in the intervening seven years ...
SO WHAT WOULD HAPPEN IF ...
WE CAPPED 'CEO-TYPE' SALARIES ALLOWABLE IN THE PUBLIC AND PRIVATE SECTORS TO A MULTIPLE OF THE MINIMUM (OR MEDIAN) WAGE?
- INCENTIVISE THE SOCIETAL AND CORPORATE DESIRE TO CONSTANTLY IMPROVE THE MINIMUM/MEDIAN WAGE AND THUS EFFECTIVELY IMPROVE THE CONTEXT OF ALL SOCIETAL MEMBERS
- REINFORCE THE PRINCIPLES OF WORKING HARDER AND WORKING BETTER AS FUNDAMENTAL TO SELF IMPROVEMENT AND SOCIAL MOVEMENT
- MAINTAIN A FUNDAMENTAL EQUITY IN SOCIETY
June 2020
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References
¹ original article - CEO compensation
² original article - Fonterrra CEO salary
³ original article - Swiss Referendum
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