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Why We Need to Set a Maximum Wage
Mark R. Reiff
Visiting Professor, Frankfurt School of Finance and Management
One of the most troubling aspects of the enormous rise in economic inequality over the last thirty years is that while compensation for almost everyone has been stagnating, compensation at the top has been skyrocketing. In 2017, each of the top 200 US CEOs made between $13.8 and $103.2 million. In most cases, this was 300 times what the median worker took home. In some cases, it was more than 1000 times, up from just 50 in 1970.
There are many more highly qualified people than senior positions
There are many things that need to be done to correct this, but one of them is to limits how much compensation those at the top can earn. My suggestion it to set the initial limit at the amount necessary to enter the top 0.01 percent of the income distribution—around $8.3 million per annum in the US, and then adjust it as necessary.
Why? Because it is not true that the amounts now being paid senior executives simply reflect the market price for their services. Executive compensation is set by taking averages within the industry. Because everyone wants to pay their new hires more than the average, the average keeps ratcheting up. There are many more highly qualified people than senior positions, so if the rules of supply and demand were working as they should, compensation would be going down.
Company performance, in turn, is mostly the result of macroeconomic conditions. This is why corporate executives rarely see their compensation drop when the company does poorly if the market did poorly as well. But this means there is no reason to reward executives lavishly when the company does well simply because market conditions have been favorable.
There is little evidence that the best people receive the highest pay
Most importantly, however, there is no point in paying executives more than necessary to get them to work as hard as they can. Do we really think that a CEO who gets paid $100 million works any harder than one who gets $50 million? $10 million? Once pay is high enough to incentivize maximum effort, extra compensation does nothing.
Nor will imposing a maximum wage cause the “best people” to flee to where they can be paid more There is little evidence that the best people receive the highest pay anyway; many of the highest paid CEOs have run their companies into the ground, and many modestly paid CEOs have turned start-ups into unicorns or turned failing companies around.
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What is this drivel about a maximum wage?
Editor, The Continental Telegraph
The idea of a maximum wage is close to a drivel. It’s not your or my money which is being paid to the individual. How can it be our moral right – or duty – to determine how much is being paid? For example, the company belongs to the shareholders, their interests are and should be paramount. The money inside the company is the property of the shareholders. How much they wish to pay the CEO to manage that business is up to them.
To insist upon a maximum wage is to limit only the incomes of the proletariat
Sure, we can try to wriggle out of this point, say that the owners are a dispersed interest who get hoodwinked by the cabal of professional managers. But private equity, which does not suffer from that principal/agent problem, pays more than public companies.
It’s not our money being paid, we don’t get to decide.
Beyond the basic morals there are certain technical difficulties with maximum wages. The people who really make money tend not to make it from wages. The sports or pop star, anyone self employed, by definition doesn’t get wages, their incomes are a mix of capital (human capital but capital all the same) and labour income. To insist upon a maximum wage is to limit only the incomes of the proletariat, those without access to the capital side of the income generation equation. It leaves entirely free the fortunes made purely from capital. A system in which wage income – that of the proletariat and much of the bourgeoisie – is capped and the wealth accumulation of the capitalist, rentier, is not doesn’t really accord with any notion of good sense.
The Laffer Curve really does exist, there’s a tax rate at which people stop going to work any more
Maybe we don’t mean a maximum wage but a maximum income. A 100% tax upon income above whatever level. Sorry folks, the Laffer Curve really does exist, there’s a tax rate at which people stop going to work any more. Our best bet, from Diamond and Saez, is around 54%. Charging a tax rate of near double the Laffer Curve peak isn’t the way to make a prosperous society. Rather, it impoverishes the future.
OK, the people who go into politics, the bureaucracy, they’ve noted that the incomes of people who do something useful for a living have soared above theirs. But the jealousy of the ruling classes really isn’t a good enough reason to have something as horribly stupid as a maximum wage.
The Maximum Wage is an Idea That Should be Forgotten
Back in 2014, the maximum wage briefly entered the public eye as a solution to wealth inequality in the United States.
Thankfully, it quickly left. It’s an idea that shouldn’t be entertained.
A maximum wage stifles competition, incentivizes poor investments, and solidifies the currently wealthy.
Maximum Wages Stifle Competition and Dynamism
High wages compensate employees for risk.
Risk might come from working at a startup or on a risky product launch at an established firm. While bonuses, commissions, and equity are great, salary pays the mortgage.
Who is going to risk a startup when a safe company pays the same?
Maximum wages ensure companies can’t attract highly paid workers from competitors. And when you eliminate employee poaching and high incomes at riskier businesses, you get stagnant industries.
Maximum Wages Encourage Malinvestment
Most maximum wage proposals leave obvious workarounds to a capped salary.
For example, take stock buybacks. With buybacks, public companies purchase their own stock and make remaining shares more valuable.
Executives generally hold more equity than other employees. Effectively, buybacks turn cash held by companies into capital gains – which mainly accrue to the largest shareholders.
Buybacks are certainly appropriate in many situations, but they’re also an effective maximum wage workaround. If capped salaries were common, you’d see even more dubious capital gains shifting schemes.
Maximum Wages Solidify The Currently Rich
Worst of all, a maximum wage locks in the currently wealthy.
Without the promise of future high incomes, the only people in a position to start companies are the already rich. And they’ll only start sure bets… which generate mostly capital gains.
The currently rich already earned a lot of money. If you cap wages, you eliminate the class of people who can diligently save and bootstrap a new company – and challenge today’s rich.
The Maximum Wage is a Bad Idea
Maximum wages are a poor solution to the real problem of wealth inequality.
Instead of making economies more vibrant and competitive, they freeze competition, encourage unproductive investments, and ignore the currently wealthy.
Further, maximum wages aren’t even the best way to provide competitive balance in
sports. A luxury tax increases overall player salaries and provides better balance
than a league salary cap (PDF).
A maximum wage sounds good but wouldn’t deliver. If we really want to address wealth inequality, the best solution is to look to an old – yet proven – one: high taxes.