We need a maximum wage to complement the minimum wage. That is, we need maximum pay ratios within companies and across sectors to put an end to chief executives getting paid more than 250 times what cleaning staff earn. Why? The top three reasons are:
- Greater equality: rising wage disparities are one of the key drivers of inequality. By putting a plug on both ends of the pay scale we help ensure decent living standards for all and avoid the negative consequences (eg higher crime, poorer public health) of living in a highly unequal society.
- The need to tame executive pay: extremely high levels of pay among executives have encouraged risk-taking behaviour (leading to the banking crisis) and have been found to hinder, not aid, the overall productivity of a company.
- Tackle over-consumption and debt: as social beings we constantly rate ourselves relative to others. Keeping up with the Joneses in an era of high inequality has led people to take on higher levels of debt and to over-consume at a level they and the planet cannot sustain.
Beyond the costs to society, academic evidence shows that once people earn an annual wage above $80,000 their wellbeing grows by very little. Thus a maximum wage would help both business and society without damaging the wellbeing of the well-off.
The neoliberal view of inequality – rejoicing in it as evidence of meritocracy – and the view articulated by proponents of The Spirit Level1 – that inequality is the main cause of modern social ills – are both inaccurate and unhelpfully dogmatic.
Runaway gaps between earners can have a negative impact upon social cohesion, behaviour, health and wellbeing. But inequality isn’t simply an evil to be addressed. Whilst it may well be wrong that the Chief Executive of a corporation earns 250 times the wage of their most lowly employee, it is manifestly fair that their most lowly employee should earn substantively more than someone who chooses not to go to work and to rely on welfare instead. Inequality is not always a social evil; sometimes it is a social good, spurring individuals to work, aspire and succeed.
Wage caps are a sledgehammer solution, therefore, to a nuanced issue. We do not want to limit the wealth that may be produced and enjoyed by entrepreneurs, but we do want to encourage business leaders to help reduce the earnings gap.
This is best pursued through social pressure on companies to state and stick to pay-ratios. Transparency in reporting and pressure through state procurement (as has worked well over the Living Wage in London) can get results without resort to simplistic, dogmatic and blunt legislative tools.
Rising wage disparities are one of the key drivers of inequality. By putting a plug on both ends of the pay scale we help ensure decent living standards for all and avoid the negative consequences (higher crime, poorer public health) of living in a highly unequal society
The assertion that wage inequality spurs us to work does not uniformly hold true. Of course some deserve greater financial reward than others, but psychological research, such as that by Dan Ariely2 and colleagues, shows that excessive money rewards are actually detrimental to performance. Instead, companies like the Australian IT company, Atlassian, who reward employees by allowing them more autonomy, time to think and be creative and increasing paid leave, have seen productivity and innovation soar. It seems then, with a bit of imagination, there is a way to limit pay and encourage, rather than discourage, the entrepreneurial spirit.
Inequality may not be the root cause of all our social problems, but it does intensify social hierarchies, making it very difficult for those struggling to make ends meet to challenge those earning 250 times what they earn. While social pressure exerted through Living Wage campaigns across the US and London have led to some (mainly public) institutions adopting higher wages for those at the bottom of the pay scale, only a tiny percentage of those on the minimum wage have benefited.
Restricting pay at the top will meet further resistance because, as we all know, when money accumulates, so does power. A maximum wage would go some way to limit the influence of the very rich, enabling a stronger civil society and democracy.
It would be neither fair nor particularly helpful simply to legislate away gaps in income (with the implied harm both to individuals who work very hard indeed and to society as we lose high-achievers) and pretend we had solved society’s problems
Professor Ariely’s work suggests that ‘excessive rewards’ are detrimental to performance, but what counts as ‘excessive’? The way in which bankers were paid – in cash bonuses that failed to reflect the value of their work to their employer – was surely more important to driving bad banking than the money itself? How we pay people can be more significant than how much they get. While we may look at bankers, footballers or CEOs and believe that their pay is excessive, it would be draconian and illiberal for us to insist that our perspective of the ‘proper remuneration’ be imposed – it is not our money, it is the shareholders’.
By insisting upon transparency of pay ratios and executive pay, we can enable and promote shareholder activism and corporate responsibility. It is right and proper that when public money is being spent there is a higher premium on fairness and we ensure no-one has their dignity impaired by employment by the taxpayer. But this shift has also driven change in the private sector and is helping to establish a new norm: Bank of America, Merrill Lynch and L’Oréal are not public-sector employers yet all pay the Living Wage. Over time, the Living Wage applies both moral and market pressure to companies – public pay ratios and political pressure can achieve the same. All without government taking fairly arbitrary and draconian action.
The Living Wage movement further undermines your claim that social pressure is enough to tackle unfair wage structures. A ‘living’ wage should be a given, not a gift, otherwise we are effectively condemning individuals to live in debt and/or have a substandard domestic and social life. How can we ever expect the majority of companies to implement a maximum wage out of choice when the ethical and socio-economic considerations are less obvious than adopting a Living Wage, and the most powerful risk seeing their wages cut?
The accusation that government restrictions impinge on individual freedoms is a common argument used against any push for a fairer distribution of wealth and income. It ignores the fact that individual decisions can incur societal costs. Excessive pay at the top results in greater inequality and over-consumption that has a cost for all in society. Remuneration boards do not calculate the costs of these negative impacts when making decisions about pay, resulting in what economists call a ‘market failure’.
Just as research has shown that a maximum wage need not mean a drop in wellbeing or productivity, it can also be used to demonstrate what is excessive and what is not. Most convincing is the mounting evidence demonstrating the urgent need to address economic inequality. A maximum wage offers us one effective way at least to rein in the wages of the rich.
I believe passionately in balancing the harm of the action against the harm of interventions. Those who wish to legislate for maximum pay rest their case on pay inequality being the most significant factor in the harms they link to it. While income is a factor in societal harms, I cannot accept it is the sole cause of problems such as social incohesion, criminality or health inequalities. Culture, family style and structure, wealth inequality and education are all as, if not more, important. It would be neither fair nor particularly helpful simply to legislate away gaps in income (with the implied harm both to individuals who work very hard indeed and to society as we lose high-achievers) and pretend we had solved society’s problems.
Conservatives look to social and political pressure as a resolution not because we are weak on the issue of income inequality but because we are strong. We know that reduced gaps will bring bounty to companies which enforce them, and we know that society is capable of exerting pressure and getting results (not just on the Living Wage but also on fair trade and on international human rights issues). We know that change must be incremental for it to be fair – that pulling the rug out from beneath our highest achievers may reduce inequality but will also reduce growth and exile many who contribute highly to our economies. Yes, fight for greater pay equality. But do so with a view to society’s complexity rather than an evangelical assumption that a change in the law will beckon utopia.
- 2009 bestseller by Richard Wilkinson and Kate Pickett which makes the case for greater equality as a social good.
- Professor of psychology and behavioural economics, who has researched perceptions of ‘ideal wealth distribution’.
This first appeared in our award-winning magazine - to read more, subscribe from just £7