Vince Cable’s “solution” to high pay…another quango
One hundred “progressive” public figures – including our very own Vince Cable – have signed up to the Compass campaign for a new quango to tackle the “excessive levels” of “banking and executive remuneration”.
Their headline grabbing stat is that an employee on minimum wage would need to work for 226 years to earn as much as a top FTSE chief exec makes in one.
My reaction to this was “so what?” Can we at least be open to the possibility it might be worth paying 226 times as much to some people as to others?
The new Premiership football season started this weekend and wage differentials in our national sport are pretty enormous.
Players at many Championship and League One clubs will be on approximately £150,000 a year. Manchester City are offering their top transfer targets salaries of up to £200,000 a week. So, a Southampton, Leeds or Norwich player could have to play football for more than half a century to match John Terry’s earnings from a single season (and despite the obvious jokes about Southampton’s fall from grace, we are unlikely to be start fielding players who are beyond retirement age). Is this a moral outrage? I’m sure some of Saints’ hard grafting, but limited, players would be delighted to be able to appeal to a panel of “experts” and insist that their salary needed to bear some “maximum ratio” relation to Frank Lampard’s. Do Compass think they should be able to?
My heart soared – fleetingly – when I read in the Compass statement’s opening paragraph “The unjust rewards of a few hundred ‘masters of the universe’ exacerbated the risks we were all exposed to many times over.”
Unfortunately, they were referring to the private sector – not to Members of Parliament.
August 17th, 2009 at 11:14 am
Jeez Mark, you’re the one Lib Dem in the world who needs MORE bar charts in your life. Perhaps I should draw you one comparing an MP’s salary to a bank’s chief executive.
August 17th, 2009 at 11:19 am
Who funds Compass?
August 17th, 2009 at 11:38 am
But the football market and ‘market’ in executive pay are different.
– Football is much more open to entry: if Man U had 20 talentless players and a good 16-year-old turned up, that 16 year old can exert pressure. This is not the same for, say, chemical industry executives, where the limited number of people with the contacts and experience can give applicants real market power
- Executives can cause real damage when they leave – client lists etc. This played a real role in my old job in the City, where ****ing useless salesmen could demand a premium for what damage they could do, not what good
- Wayne Rooney’s pay is not determined by a council comprised of Gary Neville, Cesc Fabregas and Rio Ferdinand
I am fairly convinced that a cross-sectional analysis of footballer’s pay does a better job of allocating pay to merit than executives. The analysis through time suggests both areas benefit from macro-trends beyond the sway of any individual – globalisation, technology, the Bosman ruling.
I like the way LV questions the standard lefty-interpretation of liberalism – but aren’t liberals meant to have a particular talent for noticing when concentrations of power sway the world from efficient or fair outcomes? It is sometimes possible to accept the market’s verdict a little too unquestionably.
August 17th, 2009 at 1:29 pm
@ James. My “unjust rewards” sidewipe was more about MPs expenses than salary.
@ Giles. I wouldn’t want to stretch the comparison with footballers too far. You raise fair points about some seedier aspects of British corporate culture. However, my general point is that I’m not at all bothered if top chief execs earn salaries that compare reasonably with football stars or op stars.
It seems Compass believe a 226:1 pay ratio amongst any employees is prima facie unnaceptable. To be honest, the better football analogy would be between John Terry and the bloke who cleans his boots. Both Chelsea employees – and, I’m guessing, in a greater than 226:1 payment ratio.
Compass’s complaints don’t seem to be constitutional or structural, but motivated by a concern for inequality. The moral imperative to tackle high public sector pay seems a mere afterthought.
August 17th, 2009 at 1:38 pm
But public sector pay is nothing like as out of control as the top tier in the private sector. Worse, the latter is used to justify the former. If the argument that we have to pay for the ‘best’ applies in the private sector, then surely the same applies in the public sector? Or are you saying wage theory suddenly doesn’t apply when those wages are funded by the taxpayer?
Is a payment ratio of 226:1 “prima facie” unacceptable? Absolutely. The idea that we should not be sceptical about such things is absurd. I’m not sure you mean prima facie. Are you seriously suggesting that we should just assume wide disparities like this are fine?
The contrast Giles makes (and Vince Cable makes in his CiF article today) is wholly appropriate.
August 17th, 2009 at 2:02 pm
On 226:1 – the problem is that it is an escalating number, and if we are meant to hope that pay reflects merit in some way, we would have to believe either that merit is growing at an exponential rate or that pay/rewards are outstripping merit. I know which is easier.
August 17th, 2009 at 2:03 pm
@ James. Depends what you mean by “out of control”. Do you just mean private sector salaries are generally higher? That’s not the same thing at all. I’m also increasingly unsure that it’s even true in many sectors (e.g. broadcasting).
By prima facie – I mean “on the face of it”. I actually don’t have any trouble believing the top paid person in a company is worth 226 times more than the lowest paid person. No trouble at all.
I guess you are sceptical about John Terry earning 500 times as much as the tea lady at Chelsea FC. I’m not. I think I do just assume that disparities like this are “fine”.
The Compass approach seems to be the opposite. That such a disparity can’t possibly be right. They use the wage disparity as their first assertion that things cannot be “fine” – without, say, any evidence to show the relative productivity of the workers compared.
August 17th, 2009 at 2:06 pm
Make your mind up Mark. One minute you are claiming that Compass think that a 226:1 ratio is prima facie wrong, the next you are saying that they think “such a disparity can’t possibly be right” – those are two different things entirely. Indeed, if they genuinely believed the latter then they wouldn’t be bothering with a High Pay Commission and would cut to the chase with legislation.
I thought liberals were meant to be sceptical of power? All I’m seeing from you here is a plea for blind faith.
August 17th, 2009 at 2:12 pm
James, I’m very sceptical about power – including the power wielded by quangos.
Maybe I wasn’t clear in my description of Compass’s position. I’m clear in my own mind they believe the 226:1 wage disparity is wrong/not right/socially unacceptable/economically unjustifiable etc etc. The two things you say are “entirely different” are surely two ways of saying the same thing?
August 17th, 2009 at 2:22 pm
@ Giles. Interesting point on the growth in disparity. Although I’m not sure that you can derive that this must mean either:
(a) merit at the top level is growing exponentially or
(b) the rewards at the top level are outstripping merit
It could be – for example – that a previous ratio of 50:1 or 100:1 was insufficiently rewarding of merit and that we are experiencing a liberalisation that drives top salaries to a “proper” level.
The football analogy is a good one here again. Liberalisation and the onward march of technology (meaning dozens and dozens of games a year are watchable on TV) means that John Terry is paid immensely more than the equally talented Jimmy Greaves was back in the 1960s. And the top player to tea lady salary ratio has moved from maybe 10:1 to 500:1. This causes me no sleepless nights at all.
August 17th, 2009 at 2:44 pm
I think the point is that the taxpayer doesn’t have to pick up the tab when a football team goes to the wall. That is why we have a legitimate concern about reckless bankers. Whether this is the right way to deal with it is another matter.
August 17th, 2009 at 3:03 pm
Until Jimmy Hill came along, the pay of footballers was capped; they have a lot to thank the big-chinned one. Until Bosman, their mobility was restricted. Their pay now reflects their massive mobility, and the relative powerlessness of clubs. So I don’t suffer from sleepless nights on that one – they were correcting a clear injustice. If the revenue of soccer as an industry fell, so would their pay.
Mark, I severely doubt that all we are seeing is a gradual movement up to the right level, although the word ‘right’ is clearly very loaded. If I get all economistic and presume ‘right’ to mean ‘that level at which incentives are best aligned so as to maximize the economy’s potential’, well we had long periods with far lower top-dog rewards that nevertheless saw the economy growing perfectly well. There are also cross-national comparisions with other countries (Sweden/Japan) that also contradict the idea that low boss pay was a factor limiting our growth for decades, and finally we are getting to an efficient level . . .
My experience giving out pay awards found that the reason they are a one-way street is quite simple: people do not have absolute measures of “enough pay”, but benchmark obsessively against everyone else. Kanneman and Tversky. If you try every year to get into the top quartile, the average shoots up. I wish I had a neat answer to it – but hoping/pretending it is not a problem doesn’t count.
August 17th, 2009 at 3:15 pm
Amazed that some of the posters lay claim to being ‘liberal’ – what an illiberal bunch. The post is interesting and raises the valid point that interfering in private choice raises a host of unintended consequences. Bit of a shame about Vince getting into bed with Compass – but then he’s not really a liberal either!
August 17th, 2009 at 3:18 pm
Are you making the comparisons of pre-tax or post-tax earnings. If you are doing it of pre-tax earnings, bear in mind how much of ‘top peoples’ pay’ actually goes to James Gordon Brown.
August 17th, 2009 at 3:37 pm
I’m clear in my own mind they believe the 226:1 wage disparity is wrong/not right/socially unacceptable/economically unjustifiable etc etc. The two things you say are “entirely different” are surely two ways of saying the same thing?
No. You can’t say that “prima facie” opposition to something is the same thing as “fundamentally wrong” opposition. The former suggests scepticism, the latter suggests a closed mind. There is a difference, however you spin it.
Re Quangos: everyone hates them, but no democracy in the world exists without them.
If you want to reduce the number of quangos in a strategic way then support decentralisation, greater transparency and a parliament with actual power. Adopting the Tory approach of just saying we want to “scrap quangos” and that anyone who calls for a quango is automatically wrong is plain daft.
But even at their worst, the power of quangos pales into insignificence compared to the power of bankers.
Overall, you appear to be taking a far more absolutist approach than the people you’re criticising.
August 17th, 2009 at 5:03 pm
@ James. I clearly haven’t expressed myself very well. My point is that Compass’s objections to the 226:1 seem to be intrinsic. The scale of this ratio is enough – in and of itself – to raise concern. They don’t like the look of this ratio on the face of it. They think it’s a matter of fundamental worry. Without wanting to get into a semantic argument, this is the key point I want to make.
For me, the ratio is pretty much a matter of indifference.
You might well be right that decentralisation etc., will reduce the number of quangos, although I’m not 100% confident of this. I think it’s pretty much okay to oppose the creation of new quangos as and when they are suggested, especially if they are set up to try and solve something that you’re not sure is even a problem. The High Pay Unit fits into this category for me. I’m not persuaded that I’m at one with Tories on this approach, btw.
I’m also not sure if (or why) this constitutes an absolutist stance on my part. Or – even if it does – why this makes me wrong.
August 17th, 2009 at 5:12 pm
@ Giles. Interesting point on what the “right” level is. For me, I don’t think it would just be a matter of efficiency.
August 17th, 2009 at 5:13 pm
The difference between football and bankers is ‘risk’. Some people are always going to get more than others in a free(ish) market. So what? If you’ve got a problem with that, then you’re never going to be happy (the people near the top suffer from the same unhappiness because they’re looking at even richer people!). The problem with the banker’s risks/payment structure is that their high risk/return approach exposed our current accounts and savings to risk.
What we should focus on is taking that exposure away- i.e. taking our current accounts away from the investment bankers. In other words, dismantling the mega-mergers.
I’m sure we could let a few investment banks go under if our retail banks weren’t tied into them. Couldn’t care less about Lehman- tough luck (you spinned the wheel and you lost- don’t expect us to worry about it). But the whole economy- yikes.
That’s what annoys- it feels as though we’re paying taxes direct to Madoff II.
August 17th, 2009 at 8:20 pm
Dan, some interesting points on banking. I think there are peculiarities related to the banking industry – to say the least. But the original post (and Compass’s suggested High Pay Unit) are directed at commerce and industry in general, not banking in particular.
August 18th, 2009 at 12:20 am
I don’t understand why it is apparently alright for footballers and singers to be well-paid but not bankers. I am sure that the ratio of Frank Lampard to either the person making the tea, or a Kingstonians player is huge. I am sure that the ratio of salary of Madonna to Maya von Doll is also large (you can google the latter if you don’t recognise her – she is a former student of mine).
I understand why we might not want public servants paid a fortune – after all, that is our money. I almost understand the same about Ross and other BBC employees, and understand that there is an issue with state-owned banks. But private sector bankers? If you don’t like HSBC salaries, bank with someone else! I bet that the Co-op don’t pay their bankers excessively.
I bank with HSBC. They offer me a quality of service that I like, and I am happy to pay the (implicit) price of earning 0.1% interest on my current account. They make money out of me and I am content with the service. That is surely how capitalism works. I have no idea about the extent to which their success is based on the CEO, and no idea if the CEO earns 226 my salary, or that of the bank’s lowest paid employee.
Don’t get me wrong: I care passionately about inequality and passionately about poverty. That is one reason why I vote LD – we are the only party I think will increase taxes on affluent people like me. And that is why I think issues such as the pupil premium, opportunities for people in social housing and relatively poor areas are critical. But the way to tackle them is not some quango that will force a few people – Jeremy Clarkson style – to the Isle of Man, taking their tax revenues with them.
But if you don’t like the pay rates, bank with someone else. If you don’t want a hedge fund manager to get rich, put your money in a tracker fund, invest in shares directly, or keep it in the co-op. But please, as liberals, don’t tell me that the state should dictate how much HSBC pays the CEO when I and millions of others are happy banking with HSBC.
August 18th, 2009 at 7:53 am
Everyone seems to be missing the point as far as Vince Cable is concerned; that the high pay and bonus culture in the City of London incentivised bankers to go for short term profit by making reckless lending decision and not considering the long term consquences to the overall economy, ie moral hazard.
There is also the question of the social impact of the disparities of wealth in the UK. Richard Wilkinson has done research on this http://www.equalitytrust.org.uk/why/evidence.
For these reasons I think it is a good idea to have a High Pay Commission that can research into what the effective policies options are for tackling these problems.
August 18th, 2009 at 10:01 am
I personally don’t think that the problem with high pay is because it causes financial crises to happen: financial crises happen for all sorts of reasons, the misalignment of personal incentives with what is best for the system. A rational pay structure will align incentives with the company but not the system. When someone like Jimmy Cayne had the ideal incentive to do what was right for his shareholders, he still took decisions that were bad for the system as a whole. It is a classic coordination problem, which is why a centralised institution responsible for financial instability makes sense.
What winds me up is that different positions have very different risk-reward relationships. Remember Bob Nardelli?
http://money.cnn.com/2007/01/03/news/companies/home_depot/index.htm
Not a screaming success at Home Depot but somehow able to take $210m out . . . Compare this with the risk-reward ratios at some lower-paid jobs, which ensure that they remain very low-paid owing to the ease with which they are costlessly fired.
I doubt that the mechanism of retail customer deposit withdrawal can exercise sufficient pressure on institutions like banks such that their remuneration policies can change for the better.
The implication that this is only a moral issue if the ultimate paymaster is the taxpayer puzzles me as a little arbitrary – it is not as if shareholders rationally pursuing their own interests are any better at fair outcomes – the perpetual hope of people screaming “corporate governance reform”. My own experience of the many non-meritocratic mechanisms that come to bear on pay outcomes suggest that it is also naive to hope that improved educational capabilities would result in anyone being able to get into Bob Nardelli’s position.
But I agree with Tim that the State exercising discretion over who deserves what would be no better. The best idea so far is progressive taxation.
August 18th, 2009 at 10:39 am
I think there is some confusion here, which I only realised this morning.
A number of people (including Mark) have conflated support for a High Pay Commission with support for something called a High Pay Unit.
The Compass campaign is calling for the former. To quote “We need a ‘High Pay Commission’ to launch a wide-ranging review of pay at the top. It should consider proposals to restrict excessive remuneration such as maximum wage ratios and bonus taxation to provide the just society and sustainable economy we all want.”
That won’t resolve the argument here as it is far more fundamental than that, but the proposal is not as prescriptive as some have argued here, nor is it a proposal to establish a quango (although, admittedly, it is possible it might decide to establish a quango – that is essentially unknowable).
On the public sector/private sector pay argument here, I really don’t understand the argument. Bankers are paid out of “my” money just as much as public officials, whether it represents 0.1% of my savings or 0.0001% of them. Furthermore, while people might object to public sector officials earning large wages, they also want the best public services possible. If it can be argued that it is necessary for private sector workers to earn telephone number wage packets then why does the argument suddenly break down for the public sector? Either we get what we pay for, or we don’t.
Of course in the public sector we know there has to be some kind of trade off; you can’t simply continue giving people more pay on an exponential basis. In reality the private sector has a trade off to consider as well, but it does appear that in the banking sector at least, people are working on the assumption that there isn’t. There is also the problem that the public sector ends up having to compete with the private sector for talent.
I’m sure it would suit some people very well indeed for the public sector to be drained of talent so they can denounce it as being a waste of money (whilst ignoring the deadweight in the economy all this escalation appears to represent), but I’m sure no-one here is wishing for public services to get worse.
August 18th, 2009 at 11:00 am
James
The difference between the private and public sector is that you don’t have to shop at Tesco or bank with HSBC if you dislike their CEOs’ salaries – you can go to your corner shop/farmers’ market/Co-op.
But if you don’t like salaries in the public sector there is nothing you can do – except say so, and campaign about it. That is why political discussion of top public sector pay makes more sense.
Tim
August 18th, 2009 at 11:18 am
Tim,
Your argument is flawed. Outside of cities, your options are severely limited – especially if your local Tescos forces your local shop to close. Plus, in a local authority/government you have a vote if you don’t like the way it is being run.
Now, we could certainly improve both. We could restrict Tescos from exerting monopolistic power and we could make the political system more responsive. But ultimately your argument depends on consumers/citizens being able to make informed estimates about pay rewards when most of the evidence I’ve seen suggests they’re actually quite bad at it.
My view is that large disparities in pay are due to people gaming the system more than anything else. I think a High Pay Commission would go a long way to developing policy tools to tackle that (which doesn’t necessarily mean an inflexible maximum wage). I also think the body of evidence that rising inequality is socially harmful is compelling. Now, you say above that you care passionately about inequality; surely you can’t deny that the status quo leads to precisely that?
August 18th, 2009 at 12:31 pm
I have to agree that a quango to regulate high pay is terribly illiberal. But I also DO agree that the massive (and growing) pay disparity shows that something is wrong. It’s highlighted when execs are payed VAST sums and cock things up so spectacularly that you’d clearly have been better off without them (see Mr Goodwin).
My view is if people are gaming the system, getting excessive reward for poor work and thus disadvantaging the majority you need to fix the system, not involve a bunch of bureaucrats in trying to bandaid it.
The system of incentives via contract is basically too flexible, you can have a reward totally divorced from how useful you are for the company, executives have golden parachutes and pensions which entirely ignore any poor performance. An obvious counter is that the companies involved are agreeing to these contracts. This is true and leads us to the crux of the problem, namely the market for executives (and footballers) does not satisfy the EMH.
For a market for buying execs (or footballers) to be efficient participants must:
1) Have full information about what they’re buying.
2) Have multiple suppliers from who they can buy.
3) There must be fungibility of the goods (one exec / footballer is much the same as another)
None of the above criteria are satisfied, every individual on offer will provide only the limited information, there are very few of these individuals and every individual essentially has a monopoly on their own unique services. So we have a situation where each exec / footballer is exercising monopolistic power over the clubs and companies.
As with all monopolies and inefficient markets the public at large suffer a higher cost and thus reduced standard of living. However I refuse to believe that a quango of bureaucrats will make things better, any other ideas?
August 18th, 2009 at 1:25 pm
Tesco can’t force anything to close. They can offer an alternative, which people may or may not choose to take up.
August 18th, 2009 at 1:30 pm
So monopolies and cartels don’t exist and the market is perfect, is that what you’re saying?
August 18th, 2009 at 1:43 pm
Tesco is not a monopoly and supermarkets are not a cartel, people really do choose to go to the supermarkets rather than their local shops.
This may have something to do with economies of scale (working within the market) OR loss leaders, advertising and aggressive under-pricing to kill off the competition. (working to distort the market). It’s basically impossible to know which it is that puts Tesco in such a supreme position as they, being a self serving corporation, will of course do everything in their power to gain advantage.
August 18th, 2009 at 1:52 pm
A number of people do choose to go to a supermarket. But if enough of them do then the local shop can become unviable and close, even if most of their customers don’t want it to. Those people are then forced to shop at their supermarket. I seem to recall studies which suggest this can happen with a drop of as little as 10% of local custom.
August 18th, 2009 at 2:33 pm
There are very few examples of a completely perfect market (if any), but there are often good reasons to trust market mechanisms even in imperfect situations.
Perfect information, no transport costs, no costs of entry etc. These things are rare in practice. BUT….cases of slight market failure don’t necessarily mean a need to regulate or interfere.
And in very many cases, the market choice is very good indeed. I live within walking distance of at least five banks/building societies and four supermarkets. In my neck of the woods, we don’t need local democracy to determine our banking or our food provisions. Everyone has enough choice on their doorstep.
As Tim points out, I can easily switch banks or grocery store. To some extent, it’s a perfect, rolling, proportional representation referendum. If 32.4% choose HSBC, then 32.4% get HSBC. And that needn’t affect the 27.8% who choose Barclays.
The difference with the public sector is that it includes everyone. In very crude terms, if 51% of the electorate vote for X, then the other 49% have to consume X (and/or pay for X). Wherever possible, we should allow the 51% to choose and pay for X, but the remaining 49% to choose and pay for Y or Z.
Some choices are, of course, just not viable. I might want to buy books at my local bookstore where I have a good rapport with Bill the store manager and Phyllis his assistant. Whether, this choice should be subsidised if everyone else in my area shops on Amazon is – to put it mildly – very questionable.
August 18th, 2009 at 5:21 pm
Britain is a very urban country, and we have online shopping as well. For very few people is Tesco (or Sainsbury) a monopolist. Equally if you don’t like BT you can switch. Or Scottish Power. Or HSBC. Or O2. You don’t have to read the Times if you dislike Murdoch.
I believe strongly in redistributive taxation, in reducing prices (especially for housing, whose cost reduces opportunity for many) and above all in equipping more people to earn a decent salary. I think all of these are much more important than a commission of worthies to pontificate and either achieve nothing, or create laws/quangos etc that have no place in a liberal society.
August 18th, 2009 at 8:14 pm
Bravo – well put.
August 18th, 2009 at 9:08 pm
Wow. I’ve had the “fundamentally illiberal” card played on me before, but not the “fundamentally illiberal in an unspecificed way and at an unspecified way” one.
There is clearly no point in continuing this discussion with people blessed with such enormous psychic powers that they can predict that such a Commission might actually conclude. I concede.
August 19th, 2009 at 2:01 pm
James,
I think it’s acceptable for people to discuss whether high pay is a problem before the commission reports – the possibility of a High Pay Unit has also been a central feature of the media discussion.
All too often, politicians use commissions or advisory panels etc. to stall any publci debate – either to bat issues into the long grass or to give a veneer of independence to a pre-determined outcome.
I don’t think anyoen on here has claimed psychic powers. But I don’t think you need to be psychic to have a good grasp of the range of likely proposals.
August 19th, 2009 at 2:25 pm
I don’t disagree that there is a legitimate debate to have about whether high pay is a problem or not – but the majority of people posting here (yourself excluded) in fact DO appear to recognise that it is.
The issue is, what any commission looking into the issue is likely to recommend. If it will inevitably result in the creation of something called a “high pay unit” and a maximum wage (which I dispute) then what does it say about the strength of arguments against such proposals? Arguing that we shouldn’t have the argument because we would inevitably lose is somewhat lame.
There are wider issues at stake here than the panacea of redistributive taxation (as argued by Tim and Giles and which I generally agree) would solve. There are questions about corporate culture and transparency, maybe even (whisper it) workplace and shareholder democracy. There is value in considering these options rather than dismissing them out of hand.
What I object to here is the insinuation that to support an HPC means automatically signing up to whatever worst case scenario you might have magicked up in your mind.
August 19th, 2009 at 2:55 pm
The financial world is very mobile.In the Middle Ages England produced wool and it was sent to Flanders for weaving which also helped to support their banking system . When the weavers moved to England we developed the ability to produce cloth and therefore boosted our income and helped to develop our banking system. When the Huguenots moved to london in the mid 16 century they introduced their silk weaving and commercial skills which further boosted our economy. The Flanders economy declined due to the loss of skills and money. The Huguenots helped to make England a major commercial power and deprived france of a significant part of their skilled commrcial middle classes.
International finance requires a few thousand people to be located in offics which can be moved to New York,Paris, Franfurt, Dubai, Doha, Singapore, Hong Kong or Shanghai. The German car industry relies on tens of thousands of people working in hudreds or thousands or comapanies supplying parts to the major producers: it is not particularly mobile. There is no reason why the skilled peronnel of the pharmaceutical companies could not move to the USA, France, Germany or Switzerland When considering any action, thought should be given to the mobility of the skilled personnel.
Very few in the Labour Party have any practical experience of international business and show any awareness of potential future commercial trends. The growing economies of S America, India , Middle and Far East provide reasons for finance to be located in these regions. Brown’s policy was to tax the City to pay for his spending. If finance moves out of the UK tax revenue will fall. If we had maintained a larger manufacturing capability we would have less of a problem but we have to deal with the situation we have now ,not what we would have liked to exist.
Barclays obtained money from the Middle East because investors thought they were worth it.
Standard Chartered and HSBC -Hong Kong and Shanghai Banks developed in the Far East, do we want them to return ? If we split the retail from the investment banking divisions, could the latter be more inclined to move overseas?
August 20th, 2009 at 12:45 am
James, I think a big difference between your approach and mine is that I don’t think that problems necessarily merit a “commission to look into it”. And maybe you do.
I am unpersuaded there’s a problem on high pay. But even if I thought there was, I reckon I’d be against a commission.
I can identify lots of problems in the world. To trivialise (and personalise), one major problem I have witnessed first hand is that 3,000 Saints fans paid good money to watch the total non-performance of very highly paid men wander around a football pitch in Swindon on Tuesday night.
I’m not advocating a commission to look into this though. And, if I was (God help me), I wouldn’t criticise opponents of the commission for voicing their opinions and worries before the commission reached conclusions.
Generally – but not exclusively – I fear that commissions do come up with pretty bad results.
I’m against the “commissioning” process, basically.
Particularly if it is used to stifle debate before its “neutral” panel of experts comes up with some “genius” conclusion.
If you and others are worried about high pay, go and set up your own commission.
Let us know your thoughts and findings. Engage in a debate. Ask people like me to provide evidence.
But don’t slap down the sceptics for being premature on the grounds that some state-financed grouping has yet to fully confirm their worst fears.
August 20th, 2009 at 3:25 pm
The usual Marxist-Leninist tosh that attempts to give all and each enough and present a level playing field.
No doubt, Compass will have no disagreement that those who rule over us, are deserving and meritous of high pay as the price of their loyalty and care for the people. Just as the peasants were fleeced in Russia buy Lenin his Roller, to keep the Stalin and his Commissars in food and vodka whilst the country starved, so a UK politariat will become the uber-earners, as we all get by on £20k a year, accept our subservient roles and acquiesce to our poverty, knowing that the state will care for us in our dotage as the quid pro pro.
What a load of crap, who is Compass? what are they? and who funded this drivel?
August 21st, 2009 at 2:21 pm
More of the usual bollocks from Littlewood and Leunig.
What they are basically saying is “If you don’t like the fact that some else is being greedy, then take a little less yourself. – oh no, I’ll shall be called an Marxist-Lennist now.
“And the top player to tea lady salary ratio has moved from maybe 10:1 to 500:1. This causes me no sleepless nights at all.” – Time to join the Tories again.
August 21st, 2009 at 9:29 pm
@ Tom.
Oh my God…does that pass as an argument in UK 2009????
I doubt you’re likely to make much money as a summariser.
You’re tedious as a polemicist as well.
I don’t think people that disagree with me are all Marxist-Leninists. And I truly hope that the last refuge of free marketeers is NOT the Tory Party.
Is there a reason why you’re worried about the top player to tea lady ratio moving from 10:1 to 500:1?
If so, would you care to tell us why?
You might wish to frame an argument – but feel free to fall back on bad language and personal abuse if thsi is all you can muster.
Yawn.
August 24th, 2009 at 12:54 pm
I haven’t read all the comments here, but I’ve grabbed this:
ML: I actually don’t have any trouble believing the top paid person in a company is worth 226 times more than the lowest paid person. No trouble at all.
Then you are quite simply insane.
We use statistics to dictate 90%+ of our national economic decisions, we draw arbitrary conclusions, this is more of the same. The result: quango – or whatever – is inevitable. Yes it is bad economics, no the pay is not OK.
I’m going to quote myself now from the LPUK blog:
a) The highest PAID people are the people we call fat cats, they are highly paid because they sit at the top of their own particular coercive system, they are generally incompetent, as our current situation attests…
b) …these people are NOT going to leave the country because they are not independent businessmen, they are government officials and company heads who got there through a combination of their social network/family and/or an MBA course: the purpose of which was to buy a high-paid job.[*]
c) High EARNERS are a little different, within this group are the entrepreneurs, those who started their own businesses rather than slimed their way up a hierarchy backstabbing their colleagues to get there (G Brown etc). The high earners might just take their business abroad. The high earners, the innovators, the entrepreneurs, the independent businesspeople are also known as the “wealth creators”. The corporate heads are rarely genuine wealth creators, they are often just leeches. The governmental heads are ALWAYS wealth destroyers and leeches on the public purse.
The announcement highlighted above is a reaction to the excesses – the failures – of a coercive system, not a straightforward attack on liberty. True, this is no way to deal with the problem, and no doubt they will fail to respect the distinction I have made above, but it is not as simple as people seem to think. ESPECIALLY if you (the government) actually OWN the companies who are paying the ludicrous salaries to rubbish CEOs.
* [We are right back to Adam Smith here - limiting access - pushing up pay - do homework folks!]
August 24th, 2009 at 2:05 pm
@ Gandhi. I’m not persuaded by your case, but you have at least tried to provide one. Evidence that high pay (or indeed, any pay) is derived from unfair means would be a concern to anyone.
You concede, however, that you haven’t read all the comments.
You view my assertion that a 226:1 payment ratio is not necessarily a problem as conclusive proof of my insanity. But is indifference to a 500:1 payment ratio at Chelsea FC (comparing John Terry’s salary to that of the club’s tea lady) therefore more than twice as insane?
August 24th, 2009 at 2:37 pm
You are missing out a vital fact: whether the tea is any good. I’ve heard that it’s rubbish at Chelsea, and they’ve been looking to hire someone younger from Hull or Man City for quite a while, but the agent is holding out for £15k, which is crazy money.
For an autistic economist, “insane” would mean something like “unprofitable”: i.e. if they somehow summed up all the benefits of having John Terry instead of, say, John Woodgate then the added benefits would justify the additional salary. Marginal cost = marginal revenue. Since Chelsea clearly feel they are getting a good enough bargain, it is not insane on this measure.
But lack of close substitutes – as the fans no doubt yell, ‘there’s only one John Terry’ – means that Terry is able to exercise some “monopoly power” over his output and charge a higher price for his playing than would be his strict minimum. What I mean is that if there were 1000 John Terrys and only one club, the price at which JT would play would be far less – he would be happy, in truth, to play for £1000 a week because I understand that his ability to earn in some other field (no pun intended) is rather limited. Though I think he’d make a good receptionist, or bouncer.
So JT is paid way more than he would personally, secretly “need” to get to abandon a life of bouncing and become a footballer. For that he can thank the market structure that restricts the number of competiting alternatives. Also, since football clubs make money based on a relative scale – they have to be better, rather than good – the premium going to the ‘best’ footballers is always under pressure, whereas being the 40th best central defender gets you a cosy berth in the Newcastle boot room.
Insane? There is a reason for it, so no. “Fair”? Only if your definition of fair is “whatever the market in all its many varieties happens to produce”. Most people imagine “market” to mean “perfect competition” but that is in fact very rare. The tea lady faces perfect competition. The rest enjoy the fruits of monopoly in some form or other.
August 24th, 2009 at 3:48 pm
Ha, this is one of the best comments ever posted on our site.
John Terry “would be happy, in truth, to play for £1000 a week because I understand that his ability to earn in some other field (no pun intended) is rather limited. Though I think he’d make a good receptionist, or bouncer.”
Great stuff. Or diplomat to the USA, perhaps.
Regarding your last paragraph, however, there is no such thing as perfect competition, or perfect markets, or perfect anything – it’s simply a concept invented by mankind (a bit like God, yet even less likely to exist). The idea that markets should be, or cannot be, “perfect” is a strange and contradictory one, promoted erroneously by classical economics text books.
August 24th, 2009 at 3:53 pm
ML:
To answer your question: I would say that to claim that anyone is worth 500 times more than anybody else is crazy. Whether a free market would pay 500 times more is another question, my guess is no, at least not for long. It’s pure intuition rather than provable fact, but I maintain that to think a free market would produce the same effects in the same situation is crazy, IE: to believe that the current system is producing fair results is crazy. I would argue that we need to separate the issue of what it’s OK to pay and whether specific people’s pay is arrived at fairly; in my view very few people’s pay is arrived at fairly, since the system is so horribly rigged.
It’s a case that would take forever to flesh-out, since I’d have to describe the entire economy.
The main point is that if we think there is a problem we should look to the causes rather than to mitigate the effects. You would presumably agree with that even if not with the assertion that 100s:1 pay differences are an indication of a corrupt economy.
The football analogy is very interesting, and very tempting; limiting access + rigging the system to make it look like the high paid are high earning is always an issue. If a footballer makes a lot of money he’s done so off the back of legions of others, many employed on crappy salaries; he’s benefitted from various cartelised industries with a bias to promoting his efforts through a small handful of outlets.
To argue the case for football as exceptional, you’d probably have to claim it’s an immature market in which the demand for good football way outstrips the supply of good footballers, but, as ever, you have to ask why should this be the case? Kicking a ball around a bit really isn’t that difficult you know.
I’ll have to stop there because all I’m doing is contributing to the success of the Liberal Vision fat cats without recompense!
August 24th, 2009 at 4:38 pm
Julian – thanks, and yeah, there’s no such think as perfect competition. But there is also no such thing as a Euclidean world of straight lines etc (if my half-assed understanding of post Newton physics is anything to go by), but it still provides a useful rule of thumb. Similarly in some labour markets (Burger King), I suspect the wages tend towards the level that a perfect-competition model would predict, although even then wrinkes like efficiency wages, and the need to discourage the staff from stealing meat patties, produces a higher-than-needed wage.
So, in my dull, non-moral way of seeing things, people get paid a varying factor of their “I’d rather not work” level of wages according to whether they do something scarce (head the ball 30 yards), monopolisable (Tube drivers IMHO), or that enables them to steal/demage their company (bankers. And tube drivers, again). Most are “fair” in a narrow sense: the negotiations are non-coerced at the point of signing the contract.
Football is still an interesting case: Steven Leavitt in Freakonomics calls them “tournament” models of pay, I think: he found that the footsoldiers in retail distribution of crack industry were paid very little, for quite a lot of risk (no sh1t sherlock), but were motivated by the small % chance of getting top dog position. Hence for every Tiger Woods there are 10000 golfing professionals teaching fat divorcees how to pitch and put in some county course. Perhaps, on average, footballers are paid not much; how it is then divided within the industry is a different matter.
I keep hitting the same conclusions: pay should be expected to be highly variable, it is seldom because of outright robbery/, quangos will not fix it, redistributive taxation is the least-worst solution.
August 24th, 2009 at 5:55 pm
Giles: redistributive taxation is a palliative at best, there are structural problems that need to be addressed. Tax is the most-worst solution.
August 24th, 2009 at 7:44 pm
I’m still waiting to hear what the other, best solutions are. But anything more specific – bureaucrats or worthies discussing what X in industry Y is worth, for example – are either terrible for incentives, distorting, easily avoided or some combination.
Redistributive liberalism – the least worst option. I’ll just go off and write it on a placard.
August 24th, 2009 at 9:08 pm
Giles: Oh dear.
August 25th, 2009 at 12:59 am
@ Gandhi “ML: To answer your question: I would say that to claim that anyone is worth 500 times more than anybody else is crazy”
I’m not as clear about your insanity as you seem to be about mine. In the course of a few blog posts, you now seem to latch on to the 500:1 ratio…rather than the 226:1…would 50:1 be okay? Or 100:1…or 25:1????
I think that to Chelsea FC, John Terry is worth 500 times the salary of the tea lady (at least).
I don’t even see why this would even be controversial.
I have yet to meet many Chelsea fans paying £80 a ticket who are doing so because they like the tea lady. I don’t think the Chelsea megastore sell many “Tea Lady” shirts – but they do sell thousands of Terry shirts. At a neat profit of c. £35 a pop.
This doesn’t make John Terry a more worthy human being than the tea lady. But it does make him worth at least 500 times what she is to Chelsea FC. And it’s a little quirky – possibly even verging on insane – to argue otherwise.
August 25th, 2009 at 9:14 am
ML: If that’s what you think, consider John Terry uses his own personally built “stadium” in a remote fishing village or similar, does his own advertising (by shouting “hear ye” etc), collecting the tickets himself, providing refreshments himself, bringing his own football, and playing with himself (no pun) for 90 minutes.
Are people going to pay to watch John Terry tap a ball about on his own week-after-week? How is he going to make big money unless he has access to TV revenues?
Or is there something other than just John Terry that brings in the fans?
Now consider what his never having existed would have done for the fortunes of his club – would you like to calculate the resultant reduction in today’s ticket price? The word infinitesimal comes to mind.
You have fallen for a very simplistic illusion.
August 25th, 2009 at 12:26 pm
While I think of it, even given the current system, the evidence is that John Terry (and other top stars) are overpaid.
Chelsea etc think that their top people are worth that money to them but they are wrong. It is only the fact of their common incompetence that keeps the salaries (and transfer fees) so high. Premiership pay is just another bubble.
See?
Terry demands £60m deal
Terry secures world-beating £35m contract
Roman Abramovich clears Chelsea debt
Latest figures show Premier League clubs owe £3.1bn
Crazy.
August 25th, 2009 at 1:40 pm
I think it’s actually very kind of Gandhi to offer to step in and correct the commercial decisions of private companies. Perhaps they could set up some sort of quango by which well-meaning, hyper-rational bloggers offer their advice for free to badly-led companies, thereby gently nudging them towards a more profitable and socially acceptable course? I’m slightly annoyed I didn’t think of it.
This problem is very specific to football clubs: the tournament model means that at particlar points in the “ability-outcome” curve, a small increase in the squad’s skill might produce a discontinuously sharp increase in the club’s fortunes. The sharpest such point lies at promotion/relegation to either the Champions’ League or the Premiership itself. If as a player you get to occupy that point, then you get to capture a lot of that uplift. It might be rational for a club to pay an extra £2m to a player if they think it increases the chances of getting into a league worth £50m by 5% or so.
So not necessarily incompetence, though I bet Chelsea would benefit hugely from reading all this. It is just the footballers have a unique ability to monopolise a skill, the high value of which is largely a matter of the industry structure. They should be taxed, but trying to cap transfer fees or salaries would just produce flight and evasion.
let’s move onto executives.
August 25th, 2009 at 6:33 pm
[...] Littlewood at Liberal Vision and Giles Wilkes at Centre Forum’s FreeThink covered the issue here and here, with Mark’s critical article of Vince’s intervention in particular provoking [...]
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