Last month, the Swiss voted overwhelmingly against a proposal that was billed as a pay cap for the rich. Executive pay would have been limited to 12 times the amount given to the lowest paid in a firm – a proposal rejected by over 65 per cent of voters. Whatever the merits – or otherwise – of the plan, what is interesting is how it was sold to the public, and how it was discussed in the media. The campaigners didn’t do themselves any favours.
The BBC reported: ‘The rules would have given Switzerland the world’s toughest pay rules and some of the lowest executive salaries’. The Wall Street Journal thundered: ‘In the name of combating a few high-profile examples of supposed salary excess, the Swiss were asked to make it impossible to pay many people what they rightly earned’. They were not alone in seeing the proposal as a pay cap when, of course, it was no such thing. Even under the proposal, businesses would have been free to pay their executives whatever they wanted – they would simply have had to raise the salaries of the lowest-paid to do it. The proposal should have been billed as a way to pull the bottom up, not to push the top down.
The commentators who criticised this plan were making some enormous assumptions about the behaviour of those people who would have been subject to the ‘cap’. Almost uniformly, they assumed that the bosses would rather slash their own pay, or move out of Switzerland, rather than raise the pay of those at the bottom. Presumably some would have done that, but I am not so sure that all would have. By billing this as a cap, and not as a floor – all snake and no ladder – the campaigners played into the hands of those who disagreed with the plan.
Maybe 12:1 was too radical, but what level would be appropriate? I sit on the cabinet of a London council and the ratio of my pay to that of the lowest-paid employee (who is paid the London living wage) is 1.63:1. Some will say that is too much; some will say that is too little. Either way, it is a lot less than 12:1. But what is certainly true is that we are on much firmer ground on the left when we seek to reduce inequality by raising the pay of the poorest, rather than capping the pay of the richest.
That is not at all to say that we shouldn’t care about high pay. It is simply to say that we should care more about raising low pay to reduce pay inequality. If we are serious about all people and families having the same chances to set their own paths in life and to follow those paths, then pay ratios of 200:1 and higher should make us feel queasy. That scale of inequality actively hampers life chances, and not just for those at the bottom, if the Spirit Level is to be believed.
The lowest paid in a business should share in the profits of that business, just as the poorest in a country should share in the prosperity of that country. Vast pay differentials, which often get wider as a firm does better, suggest that not everyone is sharing equally in a firm’s success. That is not only bad for social justice – it is bad for business, too. Motivating employees for a cause in which they will not share is more difficult than running a business, or a country, in which we really are all in it together.
Swiss campaigners got their message wrong. They sounded as though they were more envious of the rich than they were concerned for the poor – surely one of the reasons that voters rejected the proposal so overwhelmingly. Mandating pay ratios might have been the wrong answer, but the campaigners should at least have asked the right question. We should not be interested in pay inequality as a route to bring down the rich – we should use it to enhance the life chances of the poorest working people.
That is why the living wage is such a powerful tool. It puts money in the pockets of the poorest workers and puts the concept of a decent, affordable lifestyle centre-stage on the political agenda. That approach is popular, leading to us talking less about pay caps and more about pay floors. Unlike the Swiss proposal, our approach should be based less on pushing high earners down snakes and more about pulling low earners up ladders.
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Mark Rusling is a Labour and Cooperative councillor in the London borough of Waltham Forest and writes the Changing to Survive column. He tweets @MarkRusling
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Mark Rusling makes the assumption that the Swiss rejected the proposal to cap salaries because “Swiss campaigners got their message wrong. They sounded as though they were more envious of the rich than they were concerned for the poor”.
There is another possibility. Maybe the Swiss saw the crass stupidity of the proposal. Maybe they thought this is just pure daft, that it is not the business of the government to legislate on what a business pays its employees.
How much would it have employes to raise the floor rather than lower the ceiling? These fears of a 12:1 multiple need examination as to quite which firms would be affected and how. If your lowest paid employee is paid £12,000, is £144,000 such a dreadful salary?
Of course it is, though maybe not directly. Legislation sets the framework in which many issues surrounding pay are decided. Current law, in effect, allows company directors to decide what they are paid and many have shown themselves to be outrageously greedy, supported by remuneration committees who often seem to think that all directors should be paid above the mean. Even the shareholdes who actually own the company have no effective say. Unless top salaries are restrained, capitalism will eat itself. There is no point in producing goods and services if people are too poor to afford them, and a top: bottom ratio seems an effective way of exercising this restraint. As Mark says, this will have the very positive effect of raising pay at the bottom in proportion to rewards at the top.
“Current law, in effect, allows company directors to decide what they are paid……………..” Maybe in North Korea.
All governments running capitilist economies have no say in what business pays its employees. Minimum wages, top: bottom ratios are a falicy perpertrated by duplicitous politicians.
Government has little or no control over the economy. When politicians meddle with the economy they create problems that they cannot control. The best example of this in modern times is Gordon Brown’s decision to bale out the banks. The fall out from that crazy man’s policies will burden this country for generations. We may never get over it.
Why was it not discussed/analysed (the decision to bale out failed banks) by Labour? What would have happened if the failed banks were allowed to collapse? Some people would have lost their savings, myself included but poor people don’t have bank accounts. Labout talks about redistribution of wealth but lets be honest, its all a load of kach.
Clearly you would preferred UK banks to collapse, pension funds and with-profit policies to have kost milllons, no cash available at cashpoints, all to prove the superiority of the red-in-tooth-and-claw benefits of unfettered capitalism. I might have directed the funds aid to banks differently but I wasn’t in charge and GB was.
Just as a point of interest, how mich would you have lost directly, and how much indrirctly through investment vehicles like Unit Trusts Assurance policies and similar? How much less investment would you have made subsequently? What then would have been the (negative) multiplier effect of your personal losses? There is also the fact that in wake of the events of 2007-2008, people were less willing to invest in anything approching risk enterprises. How much greater would that reluctance have been in there had been a no-bailout policy in operation. Our recession was as much caused by fear as shortage of money, a fear that was certainly exacerbated by Cameorn et al crying doom as a mantra from May 2010 on. Recall that he planned before MAy 2010 to mach Labour’s spending pound for pound. So much for his prescience.
Yes Dan Filson I do believe banks that go burst should not be baled out by government. I think a bank is a business like any other and when a business is badly run and it runs at a loss it must be allowed to die so that other businesses/banks that are run profitably can take over that market.
As regards to what I would have lost, that is not the issue. The point I wanted to make was that when GB decided to bale out the banks he was rescuing the savings rich people not poor people. Poor people do not have savings accounts or ISAs.
It is of interest that a couple of years before the banking crisis when GB was still chancellor a small company called Fairpak went burst. Fairpak was a catalogue company that savers could put a small amount into weekly and pick presents for Christmas from what they had saved over the year. The total lost by Fairpak savers was £27m. Did GB bale out Fairpak? No he did not. He decided that an example had to be set. But 2 years later when RBS/HBOS and Northern Rock went burst he bottled it.