Thursday, 20 August 2009

How to win the argument for fair rewards

The proposal for a High Pay Commission is fine as far as it goes, but the brief is a bit woolly and the idea that policy prescriptions can be recommended now (before the Commission has done any work) looks a bit odd, writes David Coats of the Work Foundation, responding to the campaign launched by the pressure group Compass this week.

The salary cap is where the media will focus their attention and the risk is that the debate becomes polarised and the real issues get obscured. This suits both the orthodox right and the ultra-left. It is so much easier to push the discussion to extremes:"if you're against high pay you are anti-business" versus "nothing will change until we have transformed capitalism".

Following the Low Pay Commmission model doesn't seem quite right - the Low Pay Commission is a permanent body with a clear and simple task: recommending increases in the level of the National Minimum Wage. What is needed here is a process that gathers evidence and tests arguments over (say) two years before making any recommendations.

Of course, there has to be some foundation of principle on which to build. The simplest starting point would be to say that pay across the whole earnings distribution must guarantee the rate for the job and offer felt fair differentials. In other words, articulating a principle of fairness is essential for the political legitimacy of the exercise. Public confidence in the process will be low if any other approach is adopted.

This suggests in turn that the inquiry should look at the whole of the earnings distribution - not just the top - and diagnose why the middle and the bottom are falling behind.

More specifically the inquiry should address the following questions:

* Is there a relationship between talent and reward? What explains the escalating pay of those at the top? Which factors are important?

* How does the labour market for the highest paid actually work? Is it true that these rewards are driven by nothing more than the desire to recruit and retain the best? Or is there collusion and mutual backscratching generating the upward spiral of top pay?

* Is it true that most of the high value financial services sector would decamp to Dubai or New York if an effort was made to curb excesses at the top? If people did leave then how would this affect the UK economy? Would it matter at all?

* Are we talking about an exclusively Anglo-Saxon phenomenon here or have all developed countries seen an explosion of excessive rewards at the top? How have countries achieved more equitable outcomes? Where is the balance struck in those countries between regulation, taxation and social norms?

* Would it be practical to use salary caps (or average to top ratios) to restrain the exceses of the highest paid? What other instruments would work in the UK? Are corporate governance reforms needed - more transparency in the reporting of pay for eg?

The goal must be to get the rich to change their behaviour and establish a robust consensus about fair rewards. Of course people are legitimately angry about the excesses in the City, but the return to business as usual suggests that anger and headline catching initiatives (like the proposals for the Top Pay Commission) are unlikely to bring about the change that we need.

The New Right in the 80s and 90s removed the stigma associated with excessive wealth. Conspicuous consumption, which disappeared for most of the period between 1945 and 1980, has become a source of approbation over the last twenty years. If we want to establish equally effective social norms in the future then we must be clear that this is the nature of the enterprise.

The arguments of City (and business) apologists must be tackled head on through an accumulation of evidence rather than a polemic driven by the politics of envy.

The advocacy of simple solutions may make us all feel bettter. But achieving a fairer distribution of earnings is a complex process (what can we do about the reliance on low pay despite the successes of the National Minimum Wage?

How can we achieve fair shares for those in 'middling' jobs?

What can be done to restrain excess at the top?

Rising to that challenge demands a comprehensive strategy with a clear economic policy narrative ("if we do this we will do capitalism better").

Progressive political leadership is all about distilling straightforward stories from compelling evidence, enabling people to make sense of the world in which they live. So far, the centre-left in the UK has failed to offer a critique that avoids the seductions of either socialist transformation on the one hand or the desire for a return to post-war social democracy on the other.

Responding to that challenge is essential if we are to meet the admirable objectives endorsed by the supporters of the Compass statement.


Mike said...

All the solutions I can think of are:

A living wage
High taxes on bonuses
Higher capital gains tax and regulations

But we need world government else all the businesses bugger off abroad for lower taxes and less regulations.

How can the argument for world government or social Europe be put forward to the British general public? That seems crucial.

Michael said...

A Chesterton phrase comes to mind; 'too much capitalism doesn't mean too many capitalists; it means too few capitalists'. I think the answer must lie along these lines.

Letters From A Tory said...

Mike, don't you think 50% taxes on bonuses is quite enough for the government? I bet you'd be pissed off if the Government took 50% of what you earned for your hard work and talent.

Sunder, "Of course people are legitimately angry about the excesses in the City" - really? What makes their anger 'legitimate'? Socialism is the politics of envy, which is why people are angry at others getting paid so much more, but there is nothing 'legitimate' about this.

Unlike those on the Left, I understand that some industries pay considerably more than others, and if I was talented and driven enough then I could have chased the same salary too. These people would not get paid anything like the sums that they get paid if they were not talented enough to warrant it.