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Should the US Copy Switzerland and Consider a 'Maximum Wage' Ratio?
Hugh Pickens DOT Com writes "John Sutter writes at CNN that as Swiss citizens vote on November 24 to consider capping executive pay at 12 times what the lowest-paid worker at a company makes in a referendum. Some say the idea of tethering top executive pay to some sort of concrete metric might stop American execs from floating further into the stratosphere. 'Here in America, the land of unequal opportunity, the CEOs of top-500 companies make in a single day about what it takes an average "rank-and-file" worker a year to earn, according to the AFL-CIO, the federation of unions,' writes Sutter. 'Democracy starts to unravel if a few people become wildly, ethereally successful, while the rest of a country struggles.' A $1 million salary worked for American CEOs from the 1930s to 1980s, says Lynn Stout. But CEO pay, including options realized that year, jumped about 875%, to $14.1 million, from 1978 to 2012, according to the Economic Policy Institute. 'What we've got is basically an arms race,' Stout says, 'where the CEOs are competing on pay because they each want to have higher status than the others.' Peter Drucker, the father of business management, famously said the CEO-to-worker salary ratio should not exceed 20:1, which is what existed in the United States in 1965. Beyond that, managers will see an increase in 'resentment and falling morale,' said Drucker. Stout has suggested that the IRS make CEO pay a non-deductible business expense when it's higher than 100 times the minimum wage. 'Limiting CEO pay to 100 times the minimum wage would still allow top execs to be millionaires,' concludes Sutter. 'And here's the best part: If the fat cats wanted a pay increase, maybe the best way for them to get it would be to throw political weight behind a campaign to boost the minimum wage.'"
But it will never happen. Because (looks up the current thing we're supposed to hate) because socialisim!
But it's not going to work in the US, where rapid growth is part of the ostensible "American Dream" -- which includes gobs of wealth.
---- Teach Peace. It's Cheaper Than War.
I'm the sort who prefers a more socialist state but I don't see how a wage disparity causes democracy to unravel. Bad education and information are what causes democracy to unravel. Not high pay.
The voters are the ones who keep voting for status quo. If they really are desperately unhappy they should vote for something else. But they aren't. So either they aren't that unhappy, or they are voting wrong. If they are voting wrong it isn't high CxO pay, it's bad education and/or information.
That's assuming of course the elections aren't completely Diebolded.
We should simply stop giving tax dollars to these companies enabling these huge differences due to inflation paired up with government contracts. Put actual supply and demand in place and the problem they're attempting to address goes away on its own.
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So the execs will layoff the lowest paid workers and hire other companies in to do the job of those workers.
Or they will split the company and have one company own the other. Low paid workers in the one company and high paid workers in the other.
So many ways around this they will never close all the loopholes.
I know Americans don't want to hear this... but a large gap between rich and poor is BAD for society.
How do the rich get rich? By selling things to the lower and middle classes. They then put that money into economic development... which creates jobs, money that gets spent on more shit ... which goes back to the rich.
In the last 30 years, the rich have openly grabbed everything to themselves... and held down wages for the lower classes. So how do you do that and still get richer... you LEND to the lower classes. Hence the debt apocalypse we've been having.
Like it or not... the solution to all this is to income redistribution. You FORCE the rich to pay tax and put it back in at the middle and bottom - which they then spend on shit. The rich are too greedy and short-sighted to realise that this doesn't jeopardise their position... they get the money back along with development for society, the economy and less societal unrest and crime due to the massive wealth gap.
Seeing that investing is just like gambling: tax the gains like lottery winnings.
...
American CEOs usually make more money by wrecking the company for short-term gain rather than steering it towards long-term success.
The people who suffer are the people at the bottom who lose their jobs when the inevitable "downsize" comes.
This vote is a vote to break that destructive cycle not just a vote to hate on rich people.
No sig today...
Using the Physical Resources Department (Janitorial Department) of a company as an example: All a given business would have to do is contract out the work of the lowest paid employees. Since those lowest paid employees would no longer work for the original company, the CEO's pay could increase accordingly to fall in line with 12 times the next highest employee.
Repeat until every different cast of employee has formed its respective company for contract based work. There will be the association of: Janitors, Nurses, Doctors, Engineers, Car Wash Attendants, McDonalds staff, Retail Clerks, etc. At this point society will still be classed based, and very much like "A Brave New World".
"Make your society egalitarian with this 1 weird trick!"
If we postulate that this measure will leave company profits unchanged, then the cap will send extra money somewhere else. Its backers seem to assume that it would go to the rank and file workers, but I think it likelier that the owners of the firm would begin experiencing a better return on their money. That cohort, too, is wealthier than average, though not by so much as CEOs since a lot of it is comprised of pension funds and mutual funds. In any case, the loopholes around this kind of measure are so numerous that it would be silly to pursue.
What we really need is to bring back serious inheritance taxes, even if some people want to call them "death taxes". In the long run, huge wealth is not a societal problem so long as it doesn't become dynastic. Rather than playing havoc with the incentives of the living via convoluted tax laws and weird rules, let's concentrate on fighting the growth of entrenched classes.
How about a law that says movie stars can only make 100 times what the lowest wage guy on the movie set makes? Perhaps recording artists should only make some multiple of what some guy in the studio does? Maybe authors can only make some multiple of what the editors at their publishing houses make?
Does anyone really believe laws like that that would lead to net improvements in those areas, or for society in general? Paging Harrison Bergeron. This way lies madness, folks. As P.J. O'Rourke put it:
Q: What does the "B." in Benoit B. Mandelbrot stand for? A: Benoit B. Mandelbrot
This is just typical anti-capitalist politics-of-envy bollocks. "Democracy starts to unravel"? Really? Getting paid the going rate *is* the sign of a free society. Attracting the best talent cost real money. I bet most of the commenters here don't complain when their favorite sportsperson gets paid millions.
Switzerland voted on that too. Why not give everyone enough for food and housing and healthcare. Only let the 1% get rich after society is taken care of.
Exactly. It is simply unenforceable. It is just populist bullshit, in exactly the same way as raising taxes on corporations which end being 100% transferred to consumers. Corporations have way too many ways to work around regulations, and even to buy and warp them to strengthen their positions and block competition many times.
It is past time for people to start realizing that the government is not a solution against corporation abuse and will never be.
If the government can't curb them, that just leaves angry mobs killing their leaders and burning their headquarters down. Not regulating them is not an acceptable answer.
A pay ratio should be the metric for achieving a more egalitarian society, not the means. If we tried to make it the means, corporations would just find loopholes. First they'd hire outside contractors to mop the floors. Then they'd form companies to provide the service of executive management. "The lowest-paid employee at our company makes $1 million, so I can make $20 million!"
What we need is a progressive individual income tax structure in which the top marginal tax rate approaches 100% as income approaches minimum hourly wage * 24 * 365. Close all the investment and offshore accounting loopholes. With this in place, we can completely eliminate all corporate taxes.
I see the control fraud apologist brigade is right on top of this one. Corporations were successfully regulated in the US for decades, a period which coincided with a massive rise in the American standard of living.
It seems to me the bigger point is simply that the progressive tax system, which is meant to capture a lot of the diminishing marginal returns on such ridiculous pay, isn't setup to actually scale to the rates discussed. As it stands, the highest US tax bracket is in the 450,000+ range. Yet the pay range being discussed is in the multi-millions. Considering how the tax pay scale currently is setup, it'd seem that tax brackets should automatically extend as pay goes up*. So long as it's eventually an asymptotic at some point (say at 80 or 90%), then it shouldn't really matter too much how much people are paid.
Oh, and yea, this does presume that capital gains are no longer treated special and that money laundering through loans on stock or similar is harshly punished as tax evasion--ie, actually jail time.
*Something like low_bracket(x) = (x == 0) ? 0 : 16000*2^(x-1)+1, high_bracket(x) = 16000*2^x, tax_rate(x) = (x >= 16) ? 90% : 10%*5%*x; and yea, this doesn't consider the complexity of marriage and such so it's obviously not so simple, but for those curious the above reaches 90% at $524 million+. Feel free to play around with the rates if you'd rather see an asymptotic rate at closer to 50% or at different cut off. Never the less, the idea that all rich people are treated the same and yet there's much more effort to sub-divide the upper middle class (the poor and lower middle class seem well grouped) in the current tax code does tell you something.
Eurohacker European paranoia, gun rights, and h
Study the French Revolution.
What would happen is that CEO pay would end up being paid at the maximum... but there are many ways to give people value. Offshore bank accounts are one way, a wallet full of BitCoins can be another. Or if one wanted to be extremely low tech about it, large precious metal purchases physically handed to the person.
Instead, if one wanted something, try for a tax, not a ban. Bans, if they are worked around (which they will be) completely fail. However, a tax that a few people find a workaround still succeeds.
I don't like even mentioning this this, but if a country wanted a maximum wage, have an income tax curve with a sharp spike at the upper end. This can be worked around, but at least it brings some partial compliance.
You should do it. You will realize that the angry mobs were only the maneuver mass. What really made the revolution possible was the interest of the ones that had the economical power and wanted to take political power from nobility, the Bourgeoisie.
The best analogue for it today would be the people taking down the president and the congress and putting corporation executives in their place.
I'm the sort who prefers a more socialist state but I don't see how a wage disparity causes democracy to unravel
Here's a thought experiment:
1) Allocate an array of floats and set each value to 1.0.
2) Randomly choose a float, weighted by its value, and increase its value by 1%, then replace it.
"Weighted by its value" means that the probability of choosing any float is it's value divided by the sum of all values in the array.
3) Repeat 2 above for a large number of rounds.
What you will find is that over time some values will skyrocket exponentially. This happens regardless of the number of floats or the amount of increase, or whether the increase is gifted or zero-sum (ie - whether the increase is deducted from the other values). It's an effect inherent in the "increase by percent" rule, which defines an exponential growth. It also doesn't depend on the initial values, so long as the value isn't zero (negative values will skyrocket the other direction).
This mathematical model underlies much of our current economy, with net (invested) worth being the float value, and compound interest being the rule. The old saying "the rich get richer, and the poor get poorer" is rooted in mathematics.
Different rules affect the rates in different ways: compound interest is an exponential increase on value, but inflation is an exponential drain. The difference between two exponentials is itself an exponential (unless they are exactly equal), so the result is still an exponential. Government subsidy is the zero-sum rule of increasing the value of one float by taking it away from others, &c.
Consider now the effect of a fixed consumption level: food, shelter, and so on. As the system becomes more mature, ever more of the total value is stored in fewer floats, and the majority of floats become proportionally small. As mentioned, government subsidies serve to increase a few values at the expense of others, as does inflation.
When the situation matures enough that most people cannot afford food and shelter, they will revolt. They will burn down the system and try something new. (Viz: French Revolution)
Something that takes us out of the exponential mathematical model might serve to defuse discontent and revolution. Whether capping executive pay is effective or sufficient remains to be seen, but on the surface it looks like a rational response to avert a foregone outcome.
^mod up
I came here to say the very same thing.
I'm a left-leaning libertarian policywise & the minimum wage issue gives me trouble.
the progressive/liberal in me says we need minimum wage laws for the same reason we need worker safety regulations...
the libertarian in me thinks it's a temporary fix for a broken system
the Republican in me does another shot, does a line off a hooker's ass, & calls my wife to tell her I'll be late for Sunday school
but i digress...
I can't think of a good reason to oppose this whole minimum wage law Renaissance...but I see trouble brewing...
TFA is a sing of it...some sort of national "Salary Cap"???
Why don't we just raise taxes back to their...idk...Dwight D. Eisenhower levels?
Thank you Dave Raggett
Income inequality in the US has been like this before in the 1920s, then flattened out during the Great Depression into the 1950s. It'll flatten out again. The only question is "how?". It can be more or less disorderly. We can suffer from inequality for a long time though. Why does it cause problems?
I used to be part of the "oh noes! socialism" crowd, but when you look around the world and start thinking about it, you realize disparity is a problem.
I always like to pull this out of politics, and conduct a though experiment. The experiment is this: What would happen if one king had all the money?
That's the absurd projection of where we're headed. IMHO, what would happen is that money would lose its value. Long before the king had all of it, people would give up on money. They'd go to barter, or invent their own form of money.
Well, guess what? We've seen alternative currencies that people ignored like gold and silver become more popular. We've had people taking interest in novel currencies like BitCoin. Why?
Because the original money is hoarded by the wealthy. The original money game has been won. A strange thing happens when you win the money game though. Your money doesn't circulate, so it's no longer worth as much as money. Surprise, surprise, the elites are pressed to devalue the dollar. The Fed is just responding to the fact that a hoarded dollar cannot have much value.
So. If you want the dollar to have value again, it must circulate more widely. The dollar might die, but money will live on. A new generation will build wealth some other way, because the old generation is winning the money game, and... if they are allowed to fully win it they'll be left with a lot less than what they think they have. It may be due to loss of relevancy or loss of revolution.
For all intensive purposes, "whom" is no longer a word. That begs the question, "who cares"?
I've been having plenty of discussions on the topic. It's funny, as Switzerland is probably the country that needs something like this the least. The median salary is around 75,000 USD, and although there is no global minimum salary in the law, there are sectorial conventions. The salary for a supermarket cashier starts at around $4,000 USD per month, but a gardener with technical training, for instance, will not earn less that $4,600.
It's also one of the few where citizens can change their constitution easily and directly, i.e. one of the few where this could ever happen. It won't happen this time (according to the polls), although many voters I talked to just disagree with the number, not the principle.
The BBC has a nice article on it, showing the minimum and maximum salaries, and of course the ratio, for a few major Swiss companies. If you want to learn more about the direct aspects of Swiss democracy, the federal government publishes some information in English.
The problem with the 12:1 or 20:1 ratio is that you take the mail-room guy who is earning minimum wage, and you limit the executives seven levels and thirty floors up. What'll happen is quite simply that this company won't hire any mailroom employees -- instead they'll simply contract it out. Personally, and professionally, I like that. But it won't solve your problem at all.
Not allowing a company to deduct more than 100:1 as an expense makes a lot of sense. It's also quite consistent with your laws in general -- it's not socialism at all. It simply because taxable revenue. It won't stop the executive from making the same amount as now, it'll just give you tax dollars when he does -- something that you desperately need these days.
You think a CEO wants to deal with a wallet full of Bitcoins that the value varies so hugely with over time, and is still considered something that could be quashed by governments? Nah.
What they'll do is simply outsource all the low pay jobs in the copany to other companies that suddenly their spouses and friends start up. All that will be left of the parent company is executives, that can crank up their salaries at will.
no ,that is up to the shareholders, you know, the owners of the company. if they want to pay someone XX who are you or the government to tell them no?
have you seen my sig? there are many others like it but none that are the same
You say that raising minimum wages causes poverty and reduces employment as if you have some facts to back this up. Unfortunately for you the facts say the opposite: Higher wages won't increase unemployement, no harm when wages raised, "another study says you are wrong.
Anarchists never rule
Then you'll have no problem finding a shareholder vote on executive pay that was binding.
Then tie it to 100:minimum wage.
When you cant win, ad hominem.
What would happen is that CEO pay would end up being paid at the maximum... but there are many ways to give people value.
If it's just a ratio; then why not increase the rate of the lowest employee?
Fire all your low-wage employees
Create a new "Employee rental company" with separate management whose sole purpose in life is to manage all the low-wage employees. For example: "McDonalds Employee Rental company." or "McDonalds Outsourced Customer service and Kitchen Operatins Inc."
Establish a long-term contract between the two companies; so the Kitchen/CS Outsourcing company's source of revenue is that outsourcing contract. The outsourcing company hires all the low-wage workers.
The company outsourcing its operations pays this contract; that capitalizes the cost of maintaining the daily operations of all the restaurants, to the outsourcing/Employee Rental company.
McDonalds itself, has only management, then has the lowest employee paid at $10000/Hour or so.
In many cases the US government has specifically intervened to not allow capitalism/free-market to works as it should. You see, if a company goes after the maximum risk and fails taking down the economy with it, free market is supposed to let the company die and be an example, so that more efficient companies can replace it and be aware of the risks. Instead, the government bails out the company and the CEO gets a golden parachute, which pretty much breaks the free market model.
Violence is the last refuge of the incompetent. Polar Scope Align for iOS
Why should lower CEO pay even be a goal? Jealousy? Hatred of success? They work harder for their pay than lottery winners, sports stars, or movie stars.
The goal should be to increase efficiency of production of goods and services over time. "Making the pie bigger" entirely dominates "how the pie is divided" over time. Almost everyone in America has a higher standard of living than a medieval king, and certainly better health care. Damn, I'll take being a modern wage slave over a medieval king just for dentistry alone!
Socialism: a lie told by totalitarians and believed by fools.
Japan had laws like this for years, and they kept worker wages high. It was only when the laws were repealed you started seeing traditional western style wealth inequality. Now Japan's back to tent cities for the homeless. Something I never thought I'd see in that country.
As for the rich using loop holes; just because something is hard to do doesn't mean you don't do it. I've noticed that capitalists throw their hands up and say "I give" at the slightest challenge. As near as I can tell the "Free Market" means leaving things to chance and hoping for the best. I've never once in my life seen a situation where people just let the chips fall where they will and had it be anything more than a cluster-!#$@.
What I'm saying is the solution to our problems isn't hoping some vague principles and ideas will guide us to utopia (an "Invisible Hand" if you will). We need direct human action followed by careful adjustment of policies based and continual testing and data collection. You know, someone should give that method a name. It sounds kinda, I don't know, "Scientific"...
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CEO pay should be set by the stockholders. This is a right of ownership that has been taken away from stockholders. Stockholders need to take it back.
Each year, stockholders get the proxy, and put in a number. The maximum pay for the top 5 employees (the SEC tracks that) is then limited to the weighted median (by stock ownership) of that figure.
The right to vote the proxy belongs to the party that pays taxes on the stock. Pass-through entities like funds have to pass through the voting rights. For funds, holders can choose to pick a figure for the whole fund, and that's their figure for all stocks in that fund, or they can pick a figure for individual companies.
This would put an end to excessive CEO pay for loser companies. Some CEOs are worth paying a lot of money, but that's under 10% of the CEO population.
The objective is to tie their pay to the pay of everyone else in the company. The ultimate goal is to harness their personal greed to raise pay for everyone else, preferably to pull it back in line with the growth of the GDP.
They can go home, but they don't get to take the ball. If they don't want to participate in the economy they don't get to own it. That's what "Eminent Domain" is for. If you let them a small group of people will claim ownership of everything. What you end up with is a huge amount of under utilized capital. It sits around doing nothing and the entire economy grinds to a halt. Before long you see "Dark Ages" like Europe. Once that happens you either tax the rich and use the taxes to get people moving again or wait for a plague to kill them off...
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Seriously. Companies would be flattened out and become wholly owned subsidiaries of offshore conglomerates. The head of the US subsidiary would be paid 12x the janitor's wages*. But the overseas corporate HQ would be made up of the highly paid management types. And even applying the 12 times rule to them and then their US subsidiaries, this would still result in a 144:1 ratio between the top and bottom of the enterprise in its entirety.
*Of course, this ignores the secondary effect of companies pushing their low wage tasks out to subcontractors.
Have gnu, will travel.
This is patent nonsense, once you understand that a "mutually beneficial contract" is a fiction that already needs intervention to enforce. Contracts are pieces of paper with no value. They only have meaning and value because some government intervenes by deploying police with guns, and books with laws written in them, to prevent two parties from treating contracts as meaningless, which is what they naturally are in the absence of said enforcement.
There's no moral difference between a government that enforces contracts, and one that enforces a pay scale ratio, or any of a miriad other things.
Conservatives hate this because they want to be able to complain about how unfair "taxes" -- which they are if they tax economic activities -- while receiving, for free, the primary service of government.
Liberals hate this because it starts to treat government as a service business and unleashes true paleo-libertarian economics such as that promoted by Henry George and Martin Luther King Jr in his last book (the one that got him assassinated) "Where Do We Go From Here?" because what the paleo-libertarians (and Dr. King) recommend is to treat citizens as owners of the business that maintains the infrastructure of property rights by paying out citizens dividends rather than attempting to deliver social goods through bureaucratic management. Liberals serve the bureaucratic management class -- not the people -- so they oppose this even though their "saint" MLK supports it.
BTW: I find it somewhat interesting, although not too surprising, that /. isn't talking about the Swiss referendum on the unconditional basic income -- which is essentially the citizen's dividend.
Seastead this.
I hate to break it to you, but payments in stock really don't work either.
Most such payments are structured so that they get their stock options based on some performance measure. The problem is that the performance measure is continually tweaked so eventually they get their options. They either select different thresholds due to "economic" problems or adjust the mix of companies they compare themselves to so they look better. Unless you force the companies named officers to hold the stock they are paid in for a long time, there is a built in failure mode as they can just sell their stock. And, whether we like it or not, disallowing people to spend their paycheck as they see fit and when they want to - even if it is obscenely large - is just wrong.
I'd much prefer them to get paid only in dollars - no benefits of any sort that every employee in the company isn't also entitled to, no stock options, nothing except pure hard cash. Then apply the ratios. Let the employees see just how bad it is.
If you really want to change things, then start buying company stock directly and vote the proxies you get. Don't invest in mutual funds. Almost all of company proxies have approval options for the stock incentive plans and pay of named executives now. If there is a problem with how a particular company is run, vote against the plans, the pay, and any director who seems to be a problem. Until enough individual investors start picking their own stocks again, it is an uphill battle, but there are votes you can make as a stock investor that are sometimes enough to get noticed and get things changed at companies.
There's an interesting dichotomy that pervades this topic and the US in general. Christianity.
Most Americans ascribe to it so I'm told.
The basis of Christianity is to do right by your fellow human. To reject greed. To reject avarice. To be humble. To give away everything you don't need.
How the fuck does a Christian based nation allow a CEO to make enough money each year to buy a jumbo jet while the employees doing the actual work that earns the company the actual profits can't make basic ends meet on their salary?
How to the religious right... the conservatives... argue that capitalism (every man for himself, grab what you can) is an appropriate system when they state they believe the exact opposite?
Article X: The powers not delegated... by the Constitution...are reserved...to the people
If the US did this, I suspect companies would be small, and run other companies. For example: Company A would be made up of workers, direct supervisors and maybe another level of supervisors above them, keeping the bottom workers and top of this company in the 'Maximum Wage' Ratio. This company would be managed by Company B, who takes reports and consults, giving direction to Company A, providing professional resources like IT, Logistics, etc. Like Company A, Company B would have several layers, but all within the 'Maximum Wage' Ratio. However, entry level people in Company B are paid more than Top-Tier Supervisors in Company A. Two different companies, interlocking boards of directorate, but each company meets the 'Maximum Wage' Ratio.
That brings us to Company C. This company provides oversight, management and strategic planning for Company B, (which in turn gives guidance and direction to Company A.) Now, like Company B, the entry level workers for Company C make more than the top-tier supervisors in Company B. Company C is made up of what would have been the CEO, Senior VP and other VP's if Company A, B, & C were still all one big organization. but in order to not change pay rates, it simply re-organized into 3 different companies with interlocking boards of directorate, and each within the 'Maximum Wage' Ratio.
Don't get me wrong, I like the theory behind the idea. But, I'm fairly certain that US companies would come up with a way to circumvent the letter of the law and tromp all over the spirit of along the way.
Awk! Pieces of eight. Pieces of eight. Pieces of seven... ERROR: General Protection Fault. [Paroty Error.]
So you make it a percentage of growth over a minimum of NN years, maybe an increasing percentage over time. Of course that isn't entirely wonderful either, in that it would encourage growth at the expense of stability, a problem we already have with being beholden to stockholders as the #1 priority. So... say the CEO pay is delayed for an equal number of years after they leave the company, so stability is necessary if you expect to get paid.
Just throwing out wildassed notions; feel free to throw them back.
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