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Thursday 2 February 2012

Excessive Executive Pay - a Solution

The matter of executive pay and bankers' bonuses seems to be in the news again. There seems to be a widely held view that some remuneration levels are excessive. Hand in hand with this is lip service from politicians but, no actual suggestion of a solution. Politicians are stuck between a rock (the electorate) and a hard place (their funders). The real truth is that there is a lack of will to take a (calculated) risk, and actually address the problem.

So, here is a readymade solution, complete with the contra-arguments.

Various figures have been suggested as a maximum level of pay. They are all irrelevant as  they neither differentiate between an Executive and an Entrepreneur, and they would need to be reviewed to reflect inflation. This would therefore protect senior executives from inflation; a very bad starting point.

The problem calls for a different approach. Let us assume that the job of Prime Minister must be very stressful, carries great responsibility, and as such can be likened that of a CEO of a large company.

My initial suggestion was that the maximum executive pay should be limited to a multiple of the Prime Minister's pay, say two or three times. These are, admittedly, arbitrary figures and are obviously open to attack. Here are, however, two figures which cannot be challenged:

Phi (φ) The Golden Number 1.62

This number has been used for millennia as an almost magical relationship. It is found in architecture, design, mathematics, nature, art, theology, and almost anywhere that you care to investigate. This is not the place to expand on the concept (you can click on the heading for a further insight). This is however, an excellent starting point for maximum executive pay, as a multiple of the salary of the Prime Minister.

Pi (π) The ratio of the circumference of a perfect circle to its diameter 3.14

This is again a mathematical constant that is introduced to schoolchildren, as soon as it comes to calculate lengths, areas, or volumes that involve a circle. This could therefore become the maximum executive pay, including bonuses.

Now, the last thing we would want to do is stifle initiative and innovation, so executive pay must only apply to companies in which there is no restriction on who can be a shareholder (in the UK a PLC). For the sake of avoidance, this would have to include and entity (limited company, partnership, or other) that is ultimately controlled by by a PLC.

This ensures that anyone risking their personal finances in starting a company can be rewarded, without limit. There is therefore no restriction whatsoever on entrepreneurship. It is entrepreneurs who create markets and jobs. Large companies are merely a progression from the embryo; they are not creators.

So, where's the downside? Good question. Let's look at the various scenarios if this revolutionary appliance of common-sense were put into place:

1.      Static - Executives who are in place remain where they are, and accept that they are still well paid, although no longer receiving enormous remuneration. This would lead to reduced costs for companies which would be translated into lower prices and/or higher profits for shareholders (many of whom are pension funds); everyone's a winner.

2.      Mass Exodus Overseas - All, or the vast majority, of 'overpaid' executives leave their jobs in what many would call a 'brain drain'. They would be replaced by more appropriately paid staff, with the same benefit to shareholders as the Static scenario. This would also lead to lower unemployment and, therefore, a reduced tax burden. If one also assumes that such behaviour would only be executed by people who understood a market economy, the consequence of their actions will not escape them. Putting a large number of people who are expecting vast remuneration abroad will only lead to an excess of supply over demand, thereby leading to reduced remuneration. Result, you uproot, only to find that the greener grass is but an illusion.

3.      Recycling - Those people who really believe that they are worth stratospheric salaries will become Entrepreneurs. They will risk their money to develop their own companies. Result: reduced unemployment.

4.      Retirement - Having made so much money, the executives, deprived of their shareholder (or taxpayer) funded trough decide to put their feet up. Result: increased demand, as all that spare time will lead to higher spending.

Now wouldn't it be wonderful if there were a government who brought in these emergency measures, and then went one step further. As all this pay would be dependant on the PM's salary, what about if he really led by example and said "we live in tough times, I am taking a 20% pay cut"; this would be multiplied across thousands of companies.

Being a firm believer in a market economy, I never thought I would find myself writing this but, something must change.

This is obviously fairly utopic stuff but, we are all allowed to dream

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