Salary Multiples

There was an interesting discussion on the radio this morning about salary multiples – how much it is acceptable for a chief executive to earn as a mutiple of the salary of the least paid in the same business. Will Hutton has reported to the government and has come up with a maximum figure of 20x for the public service. If we assume that someone in a public sector will be on the minimum wage, we are talking about, roughly, £12,500 as the base figure. Twenty times that is £250,000 a year, a not inconsiderable salary, being nearly 10x the average salary. I know that in the private sector the figure is astronomically more – up to, say 80x the lowest paid worker. I just wonder how we can justify this for executives rather than for owners or entrepreneurs. It would seem to me that if you own a business or put a hefty sum of money into a business – in other words if you take a serious risk – then you are entitled to whatever you make. However, as an executive you do not take the same risk. You are merely running someone else’s business. As such even the 20x multiple may be too high. In Renaissance Florence a worker in the wool industry got about 40 florins a year. The foreman or chief of the workshop got 80 florins a year. A leading government official got 160 florins a year. That is a mutiple of 4. I just wonder what would happen if we started seriously reducing the salaries of top public officials. Well, if they had real ability they would migrate to the public sector and actually make money for the country. House prices would take a hit but that cannot be bad for the lower paid. Independent education would take a hit but I believe that the best schools would survive – they did in the 1960s and 1970s when marginal tax rates were far higher than today. I am just not convinced that higher salaries makes for better governance. Would you say that the standards in our schools have risen since headteachers began to be paid higher salaries – as they have in the last decade ? Would you say that hospitals are better run for the salaries paid to their chief executives ? Would you say that the service you get from your GP is better because they are now paid far more than 15 years ago ? That is not to decry paying people what they are worth but if you have a system when all people in a certain job are paid the same salary regardless of competence I think it unlikely that more money will lead to better results. I also think that the lot of lower paid workers might well be improved if some of the money in a business was siphoned down to them, especially if a portion was tied to efficiency and productivity. Those with large salaries always say that they are paid the market price. I wonder, what would happen if you really tested that market by offering lower salaries ? Bye for now.