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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!
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.
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.
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.
"it's not going to work in the US because citizens won't ever get to vote on anything like that."
FTFY.
People will still be able to make "gobs of wealth" in Switzerland, it's just that the people lower down the chain have to make money, not just the CEO.
No sig today...
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.
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".
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.
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.
Not really. They make big bux because they sit on each other's boards and quid pro quo their way to stratospheric pay.
The talent argument is a non-starter. Even CEOs that crash the company against the rocks and then abandon ship seem to find a new even higher paying position before their seat is even cold. Surely that sort of 'talent' isn't in demand.
Your whole Australia thing doesn't follow logically at all since that article is about American companies over-charging Australians.
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.
Executives are paid high salaries because (good ones at least) are sought after
There are a very small number of truly exceptional C?Os and most of those know a single industry very well and do badly when translated to other markets. According to a study that was on Slashdot a couple of years ago, the vast majority make decisions that are no better for the company that a random selection. You can replace most Fortune 500 CEOs with a magic 8 ball and get about the same performance. That's not true of most of the other employees, including the janitors, so why are they paid several orders of magnitude more? Because most of the CEOs are on the boards of other companies and approve large salaries in exchange for the same favour being paid to them.
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Study the French Revolution.
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
By this logic then surely overpaid American executives should all be unemployed as they would be replaced by harder working cheaper Chinese bosses? After all American CEOs seem to love cheaper harder-working Chinese peasantry?
Libertarian argument:
Motivate the rich by giving them more money.
Motivate the poor by giving them less.
Therefore the economy works better if poor people have to work like dogs to afford food & all the money saved can be given to billionaires. If the poor moan about this then they're clearly too lazy to start their own multinational company.
Economic debate 2013: Still stuck in the 1800s. Jeez.
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.
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
You mean the rich will still be able to make "gobs of wealth" by outsourcing all their low paying jobs to contractors or or other copanies providing the low-pay employees to do the grunt work.
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 $10000/Hour or so.
Japan had laws like this for years, and they kept worker wages high. It was only when the laws were repealed you started seeing traditional western style wealth inequality. Now Japan's back to tent cities for the homeless. Something I never thought I'd see in that country.
As for the rich using loop holes; just because something is hard to do doesn't mean you don't do it. I've noticed that capitalists throw their hands up and say "I give" at the slightest challenge. As near as I can tell the "Free Market" means leaving things to chance and hoping for the best. I've never once in my life seen a situation where people just let the chips fall where they will and had it be anything more than a cluster-!#$@.
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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Or perhaps everybody from the dock workers to those who stock the shelves full of goods have to be paid twice as much there as they do in the USA.
You're just bound and determined to make it the fault of those greedy greedy workers and their million dollar mansions, aren't you.
I say again, bullshit. One of the most aggressive, most pervasive, and most powerful unions in the United States is the International Longshoreman Association. Those would be the people who handle every piece of freight that enters the US. Your average longshoreman (not dockworker; dockworkers are the people who run pallet jacks on and off of trucks at loading docks) makes $44/hr.
A once powerful union, the Teamsters Union, moves all that freight across the country. These days only about 16% of truck drivers are Teamsters, but truck drivers in general still manage to average $18/hr.
The price of expensive, even very expensive shipping and handling labor is already factored in to the price of every piece of plastic crap sitting on Walmart's shelves, labor that costs much more than Australia's minimum wage. That plastic crap is still cheap. Famously cheap.
Repeating your religious beliefs over and over again does not make them so.
I think tying CEO pay to minimum wage is a far worse idea than tying it to the lowest paid employee.
If the CEO wage is tied to the lowest paid employee, they can always double their pay by paying the employees more. They can't individually raise the minimum wage.
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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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.