Fat cats have lapped up the cream and made a mess of the economy, the financial system and blighted the lives of many. Rather than seeking any durable reforms, the reaction is kneejerk. US President Barack Obama has suggested a $500,000 salary cap on executives at companies accepting government bail-out money. No doubt in few years this will vanish and the usual addictions would reappear. The UK government has dithered and unsurprisingly fat cats prefer their usual lavish pay packets.
Fat-cattery is rife in all sectors of the economy. In some companies, bosses pay themselves 424 times the average salary of their workers. A policy of tackle excesses in society as a whole is needed. Companies claim that "workers are our biggest asset" but then resent paying them a fair share of the wealth that they have created with their brains, brawn, muscle, sweat and tears. Around 1.5 million workers are being cheated out of their entitlement to the minimum wage. The gap between the rich and poor has doubled in the last 30 years. To check this we need a "maximum wage".
Unlike the US fixed sum cap, a dynamic approach linking executive remuneration to the wages paid to workers is needed. We should limit the maximum remuneration (salary, bonus, share options, pension, perks) for executives at public companies to 10 times the median remuneration in the same company. The proposal would mean that if executives want more they will have to raise workers' remuneration too. This is equitable since workers have helped to create wealth.
The median annual pre-tax income for the UK is about £25,000 (pdf). If a company mirrored that, then the maximum its executives should be able to collect is about £250,000 – more than enough for a comfortable lifestyle. The "10 times" remuneration should be linked to key performance indicators and subject to annual stakeholder approval. Thus employees, as well as shareholders, should vote on director remuneration. If they think directors deserve the higher reward that is fine. It is unlikely that those cheated out of the minimum wage would support exorbitant rewards for their Scrooge-like bosses. So, by democratising companies, we would be able to check antisocial practices too.
At banks, savers and borrowers should also be able to vote on director remuneration. Thus if directors have been using depositors' money for speculative activities to endanger savings, depositors may be inclined to show their displeasure by voting down their remuneration. Currently, there is no mechanism for depositors to show their displeasure. With such a mechanism, chairman of RBS could not easily walk away with £4m. The director of Barclays Bank would not be able to collect a cheque for £20m while staff working at the counters picked up less than £15,000 a year.
The above should be accompanied by disclosures showing the mean and median wages for male and female employees to highlight gender, age and ethnicity inequalities. Reduction of such inequalities could be specified as a performance indicator. Other indicators could relate to the environment, worker training, service to the local community, profits, risks, etc.
If directors violate the norms then the cost of the entire executive remuneration should become ineligible for tax deduction, ie companies will have to pay a higher tax bill. There should also be an equivalent fine on the offending directors. These penalties could create incentives to behave responsibly.
An equitable distribution of income would help to reduce inequalities and produce a society more at ease with itself. It would also stimulate the economy. Normal people buy everyday things and thus the multiplier effect on the economy would be much greater than the concentration of wealth in relatively few hands.
No doubt those who have got used to taking a disproportionate share of wealth would claim that this would deprive the country of their entrepreneurial skills. Maybe we can all do without the banking, finance, insurance and accountancy skills of those who have brought the economy to the edge of destruction. If these entrepreneurs can't live well on £250,000 a year, what do they think the maximum should be?