Just a Thought
If politicians can cap Wall Street salaries because taxpayer money is now involved, why can’t we set salary caps on the politicians? Say, no more than the median household income until they can balance the budget.
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I have long regarded executive remuneration in a lot of companies as contrary to the interests of shareholders. Remuneration should be dependent on delivering for the shareholders, who actually own the company, but often increases irrespective of whether profits rise or fall.
The trouble is, most shareholders are either uninterested (eg pension funds) or have swallowed the line that it is important to be “competitive”.
I think it’s quite appropriate that when the government is a shareholder it takes a close interest. Once the companies buy out the government and are fully private again, I wouldn’t want the government involved but I certainly hope the other shareholders catch on to the idea that remuneration is something they ought to be concerned about. Every unnecessary dollar paid in remuneration is a dollar less in profits and dividends.
As for setting caps on politicians’ salaries, we do indirectly via the ballot box. I like the idea of performance-linked remuneration for politicians too, but overall I believe they are underpaid. There are plenty of talented people who wouldn’t contemplate a career in politics because the pay is insufficient, especially when they are aware of what a rotten job it is.
I don’t think it’s politicians pay that’s the problem so much as their ridiculously high pensions after they retire.
Why are politicians entitled to such high pensions after as litle as 8 years in the job, when Defense Force personnel have to serve 20 years to receive a lower pension?
I actually think the wall street system of remuneration ought to be adopted for politicians. If the PM can reach certain targets in GDP growth etc. under a prescribed set of guidelines he ought to get a bonus of $20 million for each year GDP exceeded toe hurdle rate on a per cap basis. he can of course pay his people out of that amount however he chooses.
I agree with Sam… in fact, I’d be happy to see MP salaries double, but get rid of the excessive pensions… and most other electoral “allowances” should simply come out of their salary (a lazy and/or greedy MP that doesn’t connect with their electorate in order to increase salary will risk being voted out… competition works)
I’d be happy to see MP salaries double, but get rid of the excessive pensions
Agreed. But cutting their pensions without an increase in salary would not be reasonable.
As for electorate allowances, I wouldn’t object to removing them provided costs such as electorate staff and newsletters were tax deductible to the politician.
David – you’re right that the system of executive compensation is not working. the ratio of CEO to worker pay has moved from 30x in the 70s to 500x recently. Boards are picked largely by the CEO, who then oversee pay. it is a broken system. shareholders have to start suing Boards who are asleep at the wheel and Director’s need to be more personally liable.
Interestingly, Rudd has requested no strings for the Oz banks that he has bailed out – possibly because they pulled the wool over his eyes.
Pom
how do shareholder change that. You think boards should supervise the pay of a trader that has made three times his budget?
jc -traders are vastly overpaid – we both know that
Funny that when it was the bumper years we always experienced the most unhappiness. In bad years you felt a little lucky to have a job
Look pom I don’t believe salary caps work. Cap the comp at a certain level and you end up with the best people leaving to go to a place that doesn’t have a cap. Always happened that way and will in the future once we get over this hurdle. Once one firm breaks the cap it will start again.
I actually think the reason for the sky high salaries/comp in industry is the difficulty in finding great execs and the corresponding pressure from globalization. That won’t change.
It used to be that people worked and retired from a firm. However this sort of died in the 80′s when there were mass retrenchments and it became a different game. High paying jobs are very insecure as they should be, so asking what you think is a top line exec to move from one firm to another takes more than a handshake these days especiually if the other firm is in trouble. If they move and fail they’re dead in terms of a future so execs want insurance money to take on the risk.
Also the propensity to move from one continent to another is as easy as pie these days compared to the old times.
there’s the other thing, in the old days as long as a bozo had the right name and went to the right school they got the better jobs as competition was basically non -existent because of the way economies were structured. They really didn’t have to worry about performance much as the shareholders were pretty docile. they were basically a closed shop. These days it’s all performance or you’re out. I prefer the latter system.
Lastly firms are private entities and so it’s their right to decide on comp: not anyone else.
“Say, no more than the median household income until they can balance the budget.”
Couldn’t agree more.
But I think Plato (in "Republic") mode would go further, and say "minimum-wage levels".
That would certainly give them direct incentive to improve things.
It would be a bit hard for libertarians to espouse the minimum wage as a reference point when we want to abolish the minimum wage.
jc – i agree with your last sentence but the problem is that no bank is a genuinely private entity any more. their existence is only thanks to the largesse of the taxpayer.
the best grads will always be attracted to the highest paying industries – and for many years that has been banking. however it never ceased to amaze me how much mediocre bankers used to make. sure – pay the stars mega-bonuses, but why offer the plodders anything? i never got the commercial logic of that.
Singapore has an interesting way of paying their pollies – it’s a % of the median CEO income. cant see that going down too well over here…
I’m not sure that our polititians should have a vested interest in seeing CEO salaries increase.
Pommy
I suspect the pay liftup in hierarchical, bureaucratic companies works like this:
If You-the-Manager can point to a whole stack of highly paid subordinates, well by extension You-as-Manager deserve a proportionately higher remuneration – don’t you ??
Hence, until the mass cullings reverse the flow – there is a self-serving agenda to push whole departments up. Ever the problem of aligning the individual’s self-interest with those of other stakeholders.
Feral traders – financial and commodity – tend to be a bit different in my experience. Pay the hopefuls no more than a sniff of what flows to the top; tell the peons they are well paid for their exertions ( but don’t discuss it with anyone else ); and the head honchos cram as many Mars Bars into their own pay and bonus as possible – because at the end of the day, the trader with the most Mars Bars wins !!
I have just finished reading Michael Lewis’s “Liar’s Poker”, enjoyed it immensely and heartily recommend it as insightful recession-reading.
Rgds
Kevin
Liar’s Poker was the book that gave me the idea of becoming a trader. You read about Lewis, aged 25, receiving a US$300,000 bonus (about AUD $850,000 in today’s money) and can think one of two things;
i) they’re all evil bastards
ii) i fancy some of that
My man on the street (George, not Wall actually) tells me Australian proprietary traders are quite tight with young hopefuls, even with bonuses.
Now don’t hold that against me if you read this and I ever apply for such a job!
Kevin,
Another book you might enjoy is “When Genius Fails – The Collapse of Long Term Capital Management”.
and especially, Taleb’s ‘Fooled by Randomness’ – who argues that 99% of trading profit is caused by luck (randomness)
[...] post was inspired by the suggestion at Thought for the day (2009-02-05) that politicians be given median wages. Possibly related posts: (automatically [...]