High pay again under fire

Compass, a left-wing pressure group, has added to the continuing squabble over pay by calling for a High Pay Commission. Its proposals have attracted support from a wide range of commentators and politicians, including such a prominent figure as Vince Cable, the Lib Dem Shadow Chancellor.

 

Compass starts from the proposition that “Out of control rewards fuelled excessive risk taking that brought down the whole economy.” As I have suggested in an earlier blog post, this is highly debatable. I have just been reading the Turner Review, which in March found that “while inappropriate remuneration structures played a role, they were considerably less important than other factors….(such as) inadequate approaches to capital, accounting and liquidity.”

 

Turner points out that Lehmans’ top managers had invested large proportions of their cash bonuses in the firm, unconsciously foreshadowing the current proposals of regulators and rather undermining the Compass position that there is a simple relation between remuneration schemes, risk-taking and business failure.

 

Turner’s conclusion was reinforced by the FSA in last week’s report on the feedback to Reforming remuneration practices in financial services. Some respondents to their consultation pointed out that there was in fact very little, if any, empirical evidence that remuneration schemes directly caused the crash. Have readers seen any? The FSA see bankers’ pay as a “contributory rather than a dominant factor” – which begs the question about why they find it necessary to impose a raft of new rules: presumably because of political rather than economic imperatives.

 

Of course Compass uses the financial crisis and consequent anti-banker sentiment to demand a much wider range of intervention in firms’ pay. Reference is made by one supporter to current differentials “erod(ing) the bonds of common citizenship” and “undermin(ing) the principles of equal opportunity and the recognition of equal worth.” The campaign wants a maximum ratio of CEO pay to that of the average employee in all large firms, and higher taxation on bonuses.

 

I am as always perplexed in this debate, however, by the absence of reference to individual high earners in areas such as sport, entertainment, the legal profession and so forth. They must constitute at least as large a group of rich people as the CEOs of banks or even FTSE companies. Would a High Pay Commission be invited to deal with them as well? If so it will have its work cut out. Is Sienna Miller worth more than John Terry? Should Sienna’s pay be capped at a multiple of the second assistant focus-puller? Should John’s salary be no more than twenty times that of a youth team player? Discuss.

If I were one of your students, I would be swotting up how to answer these questions. Seem like excellent exam questions. Indeed, might be good for the IEA student essay contest next year. And Vince Cable is an economist too.

I’m rather fond of the Parable of the Vineyard (St. Matthew, chapter 20), which upholds property rights and the terms of freely undertaken labour contracts. There may be legitimate worries about whether there is freedom of entry into certain occupations — genuine competition — but talking about ‘the recognition of equal worth’ is surely begging the question. The fact is that ‘worth’, in many cases, is not equal.The argument sometimes almost relapses into the old Labour Theory of Value — which commits the fallacy of looking at the cost of the input rather than the value of the output.

Once inflation starts to kick in as well we will most likley see a return to demands for price and maybe even exchange controls.Honestly – its the 1970’s all over again. And unfortunately I see Cameron’s govt (if we end up with such a thing) as being the Heath govt reincarnate. Hey but hang on – that means Brown would be Wilson which means he’s gonna be PM again in a little over 5 years. Oh dear ….

1. Sienna Miller and John Terry do not enjoy an implicit guarantee that the government will bail out Paramount Pictures or Chelsea FC if they get themselves into trouble.2. If John Terry or Sienna Miller are so hopeless that they take down Chelsea or Paramount, the ramifications for people’s lives will be quite limited.3. When people cast their “dollar votes” for GI Joe or a Chelsea season ticket, they make a conscious decision that they value the pleasure they bring more than they value the money. People do not value the “pleasure” that bankers bring them in quite the same way.Agreed: a HPC is a lousy way to deal with this. But corporatism is the enemy for our era that nationalization and union power were in earlier decades, and the IEA needs to be careful to put itself on the right side of that debate. Defending the proceeds of state-granted privilege is not the way to do that. We couldn’t have clearer evidence than the rapid reversion to Business As Usual in the City that moral hazard was every bit as big a risk of government support for the financial services industry as politicians and intellectuals (in the Hayekian sense) were determined to pretend it was not. We should be pointing out the right way to deal with this problem (e.g. abolition of interventions that distort markets, particularly those that erect barriers to entry or provide other opportunities to create market power, disintegration of corporates that have already acquired market power or that are Too Big To Fail, and stronger anti-trust measures to prevent a recurrence) rather than deploying moral equivalence to defend the incorrigible. To quote the title of a book that a member of your SMPC recently quoted approvingly to me, we need to save capitalism from the capitalists, though I wouldn’t sully the term “capitalist” by applying it to these people. Disintegration and reeling-in the power of the corporates will be to the modern battle against corporatism what privatization and reeling-in the power of the trades unions was to the battle against state socialism.

Do you really accept that the prime or even an important cause of this crisis was the pay structure? On what evidential basis?If this “implicit guarantee” thing is to justify government intervention in pay-setting, where do you draw the line? Transport, utilities and a host of other important sectors would also have to be covered. You’ve virtually conceded the Compass argument.In any case I still don’t follow your logic. There may be an implicit guarantee that the banks won’t fail (and I agree that this ought to be addressed), but there is no guarantee whatsoever that an individual banker who screws up won’t lose his job, and that’s surely the point in designing pay structures.

The pay structure was a symptom, not a cause. A rapid relapse is a sign that the patient is still ill. A HPC is treating the symptom, not the cause. That the wrong diagnosis and prescription has been made does not mean that the patient is not ill nor that it does not need treatment.The reference to “implicit guarantee” was not to justify a HPC. I stated clearly that I thought it was a lousy idea. It was to point out that there is not moral equivalence, as you imply, between bankers with privatised profits but socialised risks, and entertainers and sportsmen who enjoy no state underwriting. Lots of bankers currently are receiving pay they wouldn’t have received without state intervention.

Bruno – A minor point, but don’t entertainers enjoy a degree of ’state underwriting’ through government subsidies of the arts, the BBC licence fee etc? Even ‘independent’ broadcasters seem to be increasingly funded by government advertising.

Richard, That’s true. TV personalities’ salaries are inflated by the non-market wages the BBC is able to offer (the price may be set in a market, but it’s effectively an auction in which the BBC bids up the price beyond the levels that an unsubsidised business would be able to justify). That reinforces the point that not all wages obtained nominally in “the market” are genuinely free-market wages. Free-marketeers needs a narrative for what to do about these situations. In the case of the BBC, that’s easy. It’s harder for bankers, but it’s also more important. And the broad solution is the same: remove subsidy and restore competition.

This amplifies the point I made earlier – where can you ever draw the line? Many private sector companies work on government contracts, or sell goods and services to local and national governments. Procurement conditions already include a wide range of socio-economic conditions which have to be met (a blog to be done on this sometime – it’s a pernicious trend) and I can well foresee submitting company pay structures to a HPC being added to the list. This idea is a fundamentally bad one and endless handwringing about wages not being set in a perfectly competitive market is just more power to Compass’s elbow.

Being protected by government and selling to government are not the same thing. Anyone who has sold to government can tell you that it is a long way from being a privilege (I’ve done it myself). It’s a necessary evil in many sectors nowadays. One of you is going to be taking it like a man, and it won’t be the government. But that’s fine. Stick to the line that bankers are just like everyone else, and are getting paid what they are worth. And watch people like Compass and “Red” Adair Turner seize the initiative (you have probably noticed that he seems to have changed his tune in his pronouncements reported today).

If I were one of your students, I would be swotting up how to answer these questions. Seem like excellent exam questions. Indeed, might be good for the IEA student essay contest next year. And Vince Cable is an economist too.

I’m rather fond of the Parable of the Vineyard (St. Matthew, chapter 20), which upholds property rights and the terms of freely undertaken labour contracts. There may be legitimate worries about whether there is freedom of entry into certain occupations — genuine competition — but talking about ‘the recognition of equal worth’ is surely begging the question. The fact is that ‘worth’, in many cases, is not equal.The argument sometimes almost relapses into the old Labour Theory of Value — which commits the fallacy of looking at the cost of the input rather than the value of the output.

Once inflation starts to kick in as well we will most likley see a return to demands for price and maybe even exchange controls.Honestly – its the 1970’s all over again. And unfortunately I see Cameron’s govt (if we end up with such a thing) as being the Heath govt reincarnate. Hey but hang on – that means Brown would be Wilson which means he’s gonna be PM again in a little over 5 years. Oh dear ….

1. Sienna Miller and John Terry do not enjoy an implicit guarantee that the government will bail out Paramount Pictures or Chelsea FC if they get themselves into trouble.2. If John Terry or Sienna Miller are so hopeless that they take down Chelsea or Paramount, the ramifications for people’s lives will be quite limited.3. When people cast their “dollar votes” for GI Joe or a Chelsea season ticket, they make a conscious decision that they value the pleasure they bring more than they value the money. People do not value the “pleasure” that bankers bring them in quite the same way.Agreed: a HPC is a lousy way to deal with this. But corporatism is the enemy for our era that nationalization and union power were in earlier decades, and the IEA needs to be careful to put itself on the right side of that debate. Defending the proceeds of state-granted privilege is not the way to do that. We couldn’t have clearer evidence than the rapid reversion to Business As Usual in the City that moral hazard was every bit as big a risk of government support for the financial services industry as politicians and intellectuals (in the Hayekian sense) were determined to pretend it was not. We should be pointing out the right way to deal with this problem (e.g. abolition of interventions that distort markets, particularly those that erect barriers to entry or provide other opportunities to create market power, disintegration of corporates that have already acquired market power or that are Too Big To Fail, and stronger anti-trust measures to prevent a recurrence) rather than deploying moral equivalence to defend the incorrigible. To quote the title of a book that a member of your SMPC recently quoted approvingly to me, we need to save capitalism from the capitalists, though I wouldn’t sully the term “capitalist” by applying it to these people. Disintegration and reeling-in the power of the corporates will be to the modern battle against corporatism what privatization and reeling-in the power of the trades unions was to the battle against state socialism.

Do you really accept that the prime or even an important cause of this crisis was the pay structure? On what evidential basis?If this “implicit guarantee” thing is to justify government intervention in pay-setting, where do you draw the line? Transport, utilities and a host of other important sectors would also have to be covered. You’ve virtually conceded the Compass argument.In any case I still don’t follow your logic. There may be an implicit guarantee that the banks won’t fail (and I agree that this ought to be addressed), but there is no guarantee whatsoever that an individual banker who screws up won’t lose his job, and that’s surely the point in designing pay structures.

The pay structure was a symptom, not a cause. A rapid relapse is a sign that the patient is still ill. A HPC is treating the symptom, not the cause. That the wrong diagnosis and prescription has been made does not mean that the patient is not ill nor that it does not need treatment.The reference to “implicit guarantee” was not to justify a HPC. I stated clearly that I thought it was a lousy idea. It was to point out that there is not moral equivalence, as you imply, between bankers with privatised profits but socialised risks, and entertainers and sportsmen who enjoy no state underwriting. Lots of bankers currently are receiving pay they wouldn’t have received without state intervention.

Bruno – A minor point, but don’t entertainers enjoy a degree of ’state underwriting’ through government subsidies of the arts, the BBC licence fee etc? Even ‘independent’ broadcasters seem to be increasingly funded by government advertising.

Richard, That’s true. TV personalities’ salaries are inflated by the non-market wages the BBC is able to offer (the price may be set in a market, but it’s effectively an auction in which the BBC bids up the price beyond the levels that an unsubsidised business would be able to justify). That reinforces the point that not all wages obtained nominally in “the market” are genuinely free-market wages. Free-marketeers needs a narrative for what to do about these situations. In the case of the BBC, that’s easy. It’s harder for bankers, but it’s also more important. And the broad solution is the same: remove subsidy and restore competition.

This amplifies the point I made earlier – where can you ever draw the line? Many private sector companies work on government contracts, or sell goods and services to local and national governments. Procurement conditions already include a wide range of socio-economic conditions which have to be met (a blog to be done on this sometime – it’s a pernicious trend) and I can well foresee submitting company pay structures to a HPC being added to the list. This idea is a fundamentally bad one and endless handwringing about wages not being set in a perfectly competitive market is just more power to Compass’s elbow.

Being protected by government and selling to government are not the same thing. Anyone who has sold to government can tell you that it is a long way from being a privilege (I’ve done it myself). It’s a necessary evil in many sectors nowadays. One of you is going to be taking it like a man, and it won’t be the government. But that’s fine. Stick to the line that bankers are just like everyone else, and are getting paid what they are worth. And watch people like Compass and “Red” Adair Turner seize the initiative (you have probably noticed that he seems to have changed his tune in his pronouncements reported today).

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