Should the US Copy Switzerland and Consider a 'Maximum Wage' Ratio? 1216
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.'"
Re:How about we force the CEO's to justify their p (Score:5, Interesting)
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.
Wait until all Janitorial is "contracted out". (Score:5, Interesting)
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".
Where does the money go, then? (Score:4, Interesting)
"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.
Why not a minimum income (Score:3, Interesting)
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.
Re:Sounds good on paper (Score:5, Interesting)
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.
Re:Yes. (Score:5, Interesting)
Re:Stock Options (Score:4, Interesting)
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.
Re:Stock Options (Score:5, Interesting)
The best analogue for it today would be the people taking down the president and the congress and putting corporation executives in their place.
Mathematical explanation (Score:5, Interesting)
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 [wikipedia.org])
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.
Re:Yes. (Score:5, Interesting)
And where, exactly, has a truly "free" market ever been observed?
I am currently on vacation in Sanya, on the Island of Hainan in southern China. There is a fruit and vegetable market two blocks from here. Anyone can bring their produce, set up a stand, and start selling. There is no fee, and no tax. There are typically hundreds of merchants, and thousands of customers (especially in the late afternoon). There is plenty of haggling, and it is easy to compare products, as a competitor is only a meter away. How is this market not free? This is not an obscure example. Billions of people shop in these sort of informal markets everyday.
find a way around (Score:5, Interesting)
^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?
After you win Monopoly, you play Risk. (Score:5, Interesting)
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.
Re:Yes. (Score:5, Interesting)
Of all countries US is one of the last in the failing list. Venezuela, Bolivia, Cuba and most of socialist Latin America, on the other hand are in utter misery. Social Democrat countries in Latin America and Europe, as France, Spain, Portugal, Brazil and Argentina are not that bad but waaay worse than US.
Do you think France is way worse than the US? If you have an income of $100,000 or more a year, you might be better off in the US (depending on what your preferences are for luxury). If you have an income of $25,000 or less, you'd be better off in France. For one thing, you'd have pretty good health care. Doctors do house calls. For another, you'd have education. University education is still free in France, after a few demonstrations in the street to preserve it. The same university education in the U.S. would cost $100,000, and most would leave most middle class students in debt for the rest of their lives.
China is indeed doing fine (compared to what it has been during its communist phase), but it is probably one of the countries who is most practicing free market in the world currently.
If you expand the definition of "free market" to include an economy in which the members of the Communist Party political elite and the army have all the capital and and all the connections, and make all the money. The most important thing is still who your father is. It's not a country where a bright, hardworking young guy from the country can rise like Andrew Carnegie. Their health care system is a horror. Doctors give treatments that actually harm their patients (like quack "brain surgery" and IV antibiotics), because the treatments are very profitable.
They adopted the former model of the CP and army running everything, and turned it into capitalist factories where the same people who ran the CP and army still run everything.
So, you see the farther you go from Free Market the poorer the economy of a given country does. You can analyze any country throughout its history.
If you look at China throughout its history, it was during the Communist period that they turned an illiterate country into a country where everyone could read. That was the indisputable great accomplishment of the Communist party in most parts of the world -- they taught everyone to read. (When the Communists controlled Afghanistan, girls and women were going to school.) The Chinese Communists turned China into a country with a literate, educated population and an industrial base for its new capitalists to take advantage of.
You seem to be looking at social indicators selectively. There are several in which the US does badly. For example, we have among the lowest social mobility in the developed world. In the US, your father's income and social status determine your income and social status to a greater degree than almost anywhere else. We're equal to Brazil. Our health care indicators aren't that good either.
deductible idea good, ratio bad (Score:4, Interesting)
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.
Re:Yes. (Score:3, Interesting)
Maybe not. It's possible in those markets that are "free enough" that it's the part that's NOT free that demonstrates the advantage (or disadvantage).
You can say that one market is freer than another, sure, but you can't say which of those will be more successful.
Plus, there is a tendency of those that become successful in the market automatically seek to destroy the "free" part of the market. The largest corporations do not want a free market, they want pricing power, which is the opposite of a free market. Inevitably, five companies will become three which will become two, and then the game becomes finding a way to circumvent the anti-trust laws to make it one.
I believe that the ultimate measure of a success in an economy is not how free it is, but how the part that's not free is handled by society. Of course, if you measure the success of an economy by how much money the most successful person makes, the answer is different. In my opinion, the best way to measure a successful economy is by the amount of economic mobility. A successful economy is one where a poor person can become rich and a rich one can become poor. That's economic freedom, not what we have, which is basically a guarantee that a rich person will never lose a dime.
Re:Yes, no hmm (Score:5, Interesting)
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 [salon.com], no harm when wages raised [aneconomicsense.com], "another study says you are wrong. [businessinsider.com]
Re:Ratio (Score:5, Interesting)
Are you referencing the 1920's, where the rich had no limits and they gobbled up everything and the entire economy tanked(1929, great depression, etc), so we put limits on them, taxed them, built infrastructure, and we had a really good run afterward?
Ironically, I don't think you are. Those that do not learn from history looking like idiots on the internet indeed....
Re:Yes. (Score:2, Interesting)
They will try and run from it, that is a given. But better to at least try and improve things rather than to sit there and complain and do nothing about it.
I hope they try this, I hope it goes global. I would rather try and fail so I can try again with a better approach than to do nothing and sit there suffering or complaining how I tried nothing and ran out of stuff to do.
If we went with that approach, blacks would still be slaves, women would still be confined to the home, workers would have no protections and would be virtual slaves anyways....Until you are willing to try and improve things, things don't get better and so long as the ones at the top are adapting and we aren't, we lose.
Re:Yes. (Score:5, Interesting)
You can analyze literally any proposal for regulation with:
1) People will try to cheat
2) If we stop them from cheating they will leave
and you wouldn't be wrong.
But I don't understand why that means we shouldn't try.
Depends (Score:2, Interesting)
Words can and do change their meaning, and people can improve on systems through careful application of basic Scientific principles. e.g. not taking anything on faith and being willing to admit when you're wrong. Socialists have long since recognized that the State can't take over the means of production. You never get past the "Dictatorship of the proletariat" phase. Instead we advocate a complex system that lends itself well to checks and balances.
That's sorta what makes real Socialism work. The only "principle" we have is that everyone is entitles to a good life, with food, shelter and health care. And we're willing to admit when we're wrong and adjust accordingly. The result is a system that is harder to maintain but also harder to exploit.
Worked fine in Japan (Score:5, Interesting)
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"...
Re:Yes. (Score:4, Interesting)
I don't understand how any of that address the points I made but:
I believe it's a moral imperative to limit the maximum pay ratio, based on precisely the same factors you used to determine it was morally wrong (I assume, since you didn't list any). I also don't see it as a penalty for the rich any more than taxes are.
Perhaps more importantly I do not see how limiting the pay ratio is something that could be "extended to all of the country" with respect to limiting everyone's pay (or again, how that's fundamentally different than income tax) -- by definition a pay ratio limit only affects the highest pay rates.
Re:Sounds good on paper (Score:5, Interesting)
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.
Re:Yes. (Score:2, Interesting)
Let's try something that goes exactly contrary to what the study of human action tells us, that will certainly lead to increased poverty, a lower standard of living, and potentially death
The problem is that there are two types of humans; two races. Real people and Psychopaths.
Humans are not evil, greedy bastards by nature; we get to choose. Psychopaths have no choice. Creating a system designed to allow psychopaths an obstacle free route to dominance serves the wrong race.
There's more of us than them, and real people don't automatically choose a course of behavior which *cannot* avoid the total destruction of our social and physical environment. I for one would like to manipulate the current system so that it locks down psychopaths and allows real people the room to breathe and prosper. This can only be done by implementing fair rules to which we stick.
Re:Yes. (Score:4, Interesting)
No, it limits the pay of CEOs. And even they can get more pay simply by paying their underlings more. Which is only fair, since it's those underlings who actually did the work for the achievement the CEO is taking credit for.
That said, I agree with you conlusion about the actual results. Sociopathic professional looters have no trouble finding new and exciting ways to game the system and crashing the economy again and again and again. Once systemic corruption takes hold, as it has, it's almost impossible to purge.
Oh well. Times have changed before, they will change again, and given the increasing pace of change I'd say they're about to. It'll be exciting to see what'll replace global capitalism, and whether it'll be an improvement.
Let 'em leave. (Score:5, Interesting)
Re:Yes. (Score:2, Interesting)
I think he's worried that the fruit he may buy does not conform with the rules allowing someone to market them as organic, or that oranges won't have artificially coloured skins and thus won't look as good, or that the Apple's won't be coated in a layer of wax which acts as a preservative, or that his peach won't be perfectly round and massive, or [insert other stupid regulation that makes food worse here].
I lived in Europe a while as well. I preferred to go shop from a local market rather than the supermarket. It didn't look the same, but man it was MUCH better.
Re:Mathematical explanation (Score:5, Interesting)
I really like this post. I have been playing with (or -- threatening to play with) a nearly identical model myself. There are a number of things to prove about this Markov chain, including what the stationary distribution is.
One additional effect to consider would be something like a "blur kernel," which could describe the flow of wealth within the economy to "nearby" individuals (e.g., the coffee shops in the finance district might be able to charge more, and so wealth will tend to diffuse to them). I think that effects like this are, at least in theory, what are supposed to prevent the excessive concentration of capital. Modeled on a graph, one could ask questions like, "How does income inequality (e.g., Gini coefficient) change as a function of graph connectivity (e.g., Fiedler number)?" The obvious story then would be that, as the economy becomes increasingly centralized in a topological sense (with some appropriate graph-theoretic measure of centralization), or as people become less dependent on commerce with their peers, distributions sharpen and inequality grows.
Finally, I'll add that there are other models of social phenomena, like armed conflict, with similar "inequality exacerbating" properties; see e.g. Lanchester's square law [wikipedia.org] of combat. In fact, I think RTS games like Starcraft are an interesting model for this kind of thing -- they're really-abstracted models of violent societies -- and, between Lanchester's square law, and the exponential growth of the economy (the rate at which you can build SCVs is the rate at which you can mine minerals is the rate at which you can build SCVs...), you see the same kind of positive feedback there. Of course, I don't think you need a full-on video game to demonstrate this; the old board game Monopoly was invented by a Quaker woman to exhibit the same property and so demonstrate the evils of capitalism (...and everyone missed the point). In short, I think it's easy, and interesting, to construct mathematical systems that broadly have these properties.
Of course, to turn this kind of mathematical play into something with actual predictive power -- to do science -- would be a whole 'nother undertaking.
Re:Yes. (Score:2, Interesting)
Wrong.. It is saying person X cannot make more then Y amount. There is the possibility of making more if they raise the salaries of others but economics would/could forbid that. No amount of wrangling the terms can get around that.
Lets walk through this a bit. Suppose you have a lawnmower and mow yards for $10 an hour profit. You buy another and hire someone to do the same and pay them $10 an hour. You continue until all the sudden, you don't do the work yourself and have employees doing it for you. Lets say you make on average $5 per yard profit to yourself and still pay the employees $10 an hour for their work. So now you have 140 employees making $10 an hour and you make $5 multiplied by 140 or $700 an hour. All the sudden, you cannot make this amount because it is over the 12:1 ratio. This is despite the fact that you will have to pay the maintenance and replacement costs of the lawnmowers from your own pocket. So lets say you raise your employees salary, now all the sudden, I decide it is a lucrative market and enter in competition to you when I see you paying these employees so much. I high in at $8 an hour and take all your accounts. You are hamstrung paying the excessive wages and have no savings to boot from because of the 12:1 rules and end up closing down. I end up getting big and someone else comes in doing the same. And very few employees will ever take a cut in pay in order to save the company. We have seen companies completely shut down in the past due to this refusal to give back. And I can understand why they don't want to give back, they lives have become adjusted to the extra pay and they may have loans and other obligations that rely on it.
Re:Ludicrous Douche (Score:5, Interesting)
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.
Re:Yes. (Score:5, Interesting)
It is about economic growth because when you place restraints like this on the market, there are real economic consequences.
In real terms (PPP), for the vast majority of the population, there has been no economic growth in the west since the 80s. All the economic benefits since then have accrued only to the wealthy elite.
So the current system is clearly failing - it is not delivering benefit to society.