‘Pay restraint must include private sector’


11:00 am - July 4th 2010

by Clifford Singer    


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Equality campaign One Society has issued an excellent response to reports of high wages earned by quango and union chiefs.

There is no excuse for some labour leaders, in particular, to be earning six-figure sums. But the real rot remains in the private sector, where bonuses and top salaries continue to spiral while the rest of us are promised an age of austerity.

What One Society don’t say, however, is that the TaxPayers’ Alliance is targetting unions for one reason: to undermine opposition to public sector cuts and the increased inequality those cuts will bring.

One Society Media Release: 2 July 2010

Pay restraint starts at home, but must include private sector

  • The links between health and pay inequalities
  • Top pay in every sector out of balance
  • Pay transparency is not enough; need to introduce wage ratios
  • Call for trade union leaders to back wage ratios within their own unions and for wider economy

Responding to the release of data on top pay within quangos, Malcolm Clark, campaign director of One Society, said:

“On a day when a report finds the life expectancy gap between rich and poor widening, we are confronted with yet more stories of high salaries for the few. The rewards – both financial and health-wise – of the past decade’s economic growth have disproportionately gone to those already at the top. And we fear this entrenched inequality is set to continue.”

“Those with the broadest shoulders are not bearing the broadest burden of reducing the deficit. Instead, these people had the broadest smiles after the Budget; having avoided a significant Capital Gains Tax rise or other measures beyond what was already in place from previous Budgets. Whereas, the impact of benefit changes, the VAT rise, cuts and rising unemployment will be felt much more keenly lower down the income scale. That balance needs to be redressed.”

“Where the Government and the Tax Payers’ Alliance are correct is in thinking that good practice should start at home – within the public sector, quangos and employee representation bodies (including the unions). Increased pay transparency is not going to make much difference on its own though.”

“What will is introducing wage ratios, where top pay is capped at a maximum multiple of the salary of the lowest paid employees. For the unions, wage ratios have the added advantage of focusing attention on the lowest as well as the highest earnings within an organisation: giving momentum to bring low wages up whilst stemming runaway pay at the top.”

“The Greater London Assembly has set the standard for others to follow: committing not just to a 1:20 wage ratio; but to lowering that over-time to 1:10 (as well as paying the London Living Wage as a minimum salary). That lower figure is already within easy reach for trade unions, and could be used as a starting point for going further, including within the workplaces of their members. We will shortly be calling on the candidates for General Secretary of Unite union to back such a move.”

“However, the Tax Payers’ Alliance and others should worry more about the salaries of private sector contractors and consultants whose inflated pay drains valuable money out of the public sector. Precisely as the government’s Fair Pay Review acknowledges in its terms of reference: ‘distortions and market failures in private sector pay create pressure for unfair pay multiples in the public sector’. Only once we have transparent and fair pay – including wage ratios – in the private sector will real change (and savings) in the public sector be possible.”

Why else has the TPA suddenly extended its remit to look beyond public spending? And now that unions are fair game, surely it’s time for the TPA to come clean on its own opaque finances?

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This is a guest contribution. Clifford Singer runs The Other Taxpayer's Alliance website. You can join the Facebook group here.
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Reader comments


Simple, nobody forces you under threat of jail to pay for those private sector salaries. If the people who own those companies want to impose pay restraint they can do so.

“What will is introducing wage ratios, where top pay is capped at a maximum multiple of the salary of the lowest paid employees.”

So the highly paid set themselves up as consultants not employees. Jeebus, not sure I’ve seen an idea so easily thwarted.

3. Biffy Dunderdale

Goodness me, this is some of the most wooly thinking I have seen for a long time, even from the Left. The simple fact is that it is no one’s business what salaries are in the private sector. There is no equivalence with the public sector because private sector staff are not paid using taxpayers’ money. Its as simple as that. If I set up a business and choose to pay my staff unsustainable salaries, the business will quickly go bust. I.e. its is brutally self-regulating.

Its pretty outrageous to hold the country to ransom by saying that a pre-condition of the public sector belatedly getting its house in order is an unprecedented intrusion of the State into something it has no right to be invoved in.

Ideological loony-left bo**ocks

4. Richard W

State sanctioned price floors and ceilings have distortionary costs so they are usually undesirable. One way of having pay restraint on publicly quoted companies imposed by shareholders rather than government decree is reform of shareholding voting rights. The holder of one share should have the same voting power as the institutional investor who owns 10 million shares. In democratic civil society we no longer give more voting rights based on wealth or ownership of land, it is one citizen one vote. Currently more often than not small shareholders proposals are defeated by the block vote of the institutional investors. Some may set up proxies to try to circumvent any reform, but it would still be a lot more democratic then the current system.

5. Sevillista

@biffy

“There is no equivalence with the public sector because private sector staff are not paid using taxpayers’ money. Its as simple as that”

Is your understanding of how our economy works so primitive?

Lots of private sector staff are paid with taxpayers money.

For example:

* Biffa and other waste collection firms are paid taxpayer’s money to collect waste
* PWC and other accounting and auditing firms are paid taxpayer’s money to audit the books
* Goldman Sachs received a huge amount of taxpayer’s money to advise the Government during the banking bail-out
* The profits of the entire banking sector over the past few years are built on the taxpayer’s money used to bail them out
* Central government clients spent £1.5 billion of taxpayer’s money with consultants last year
* Private rail companies receive taxpayer’s money directly (through payments to operate services) and indirectly (through the public subsidy to National Rail to pay for the rail infrastructure they use)
* Private sector construction companies depend on taxpayer’s money used to build and maintain public sector assets
* Pharmaceutical companies depend on taxpayer’s money used to purchase drugs on the NHS
* Private sector weapons manufacturers depend on taxpayer’s money to pay for the armed forces which demand their weapons

I could go on and on. You either have no understanding at all of economics or you are deliberately trying to mislead others to back your flawed argument.

And state intervention in private sector pay is also justified in some sectors (e.g. banking) where there is strong evidence that the labour market is riddled with market failures and institutional failures that mean managers are not acting in the best interests of owners.

There are also negative externalities (costs imposed on others in society) of massive pay causing stark inequality and so an economic rationale for intervention from that as well.

“institutional failures that mean managers are not acting in the best interests of owners.”

That’s a very good description of both hte political class and the civil service. So let’s fire them all!

BTW, yes, James Buchanan did get the Nobel Prize for economics for pointing out that “”institutional failures that mean managers (of the public sector) are not acting in the best interests of owners.”

Wait a minute though. No private Company could survive without society at some level or another. This idea that private companies are somehow out with the Country and exist in some kind parallel Universe is just nonsense. Every part of society relies completely on the other constituent parts.

How many business exist purely where no trace of ‘Society’ or the State exists?

8. Sevillista

Oh, and @biffy

The Government’s Public Sector Statistical
Analysis shows this clearly.

Expenditure on public sector pay (gross of tax, NI etc) was £164 billion.

Expenditure on procurement – buying goods and services from the private sector -was £196 billion.

So more “taxpayer’s money” goes to the private sector than the public sector. Does this mean that it’s more urgent for the state to intervene in private sector salaries (at least in those companies receiving state funds)?

See page 71 of http://www.hm-treasury.gov.uk/d/pesa_2010_complete.pdf

” This idea that private companies are somehow out with the Country and exist in some kind parallel Universe is just nonsense. Every part of society relies completely on the other constituent parts.

How many business exist purely where no trace of ‘Society’ or the State exists?”

Arguendo: when BP pumps up oil in Alaska and sells in in Japan (as they do) what benefit do they get from the UK government?

And if no benefit, why does BP pay corporation tax to the UK government on oil they’ve pumped in Alaska and sold in Japan (which they do).

10. Sevillista

@TimW

Where did I say that private sector staff should be fired for the existence of poor incentive structures?

The argument was there is probably a case for Government intervention to create the institutional framework to improve the incentive structure and to make private sector managers operate in the interests of owners.

Or maybe you would argue that RBS and other banks acted completely in tune with the interests of their creditors (deposit holders) and owners? That high pay (and a pay incentive system geared towards short-term paper returns and shoddy risk management to ignore the long-term financial returns) was entirely in tune with those interests?

And that high banking salaries built on a state guarantee to step in when all goes tits up as financial institutions have been allowed to get too big through deregulation that ignored the large state guarantees are efficient?

11. Biffy Dunderdale

@sevillista

“Lots of private sector staff are paid with taxpayers money.”

And?

JK Rowling is paid with my money every time I buy a Harry Potter book. Does that mean I have the right to set/cap her income? When I buy a radiator for my living room,does that transaction give me rights over the pay grades in the radiator company?

Of course not. To suggest it should mean that is utterly ridiculous. It is completely irrelevant.

If public sector procurement officials decide that they don’t want to buy goods and services from companies whose CEOs earn the same as the average trade union leader, they can. I would question the value for money argument and would suggest there are better ways to get the best value for the taxpayer (probably to not spend the money in the first place) but it is a somewhat logical, if ultimately wrongheaded, course to take.

I choose not to spend my hard-earned pennies on gold-plated taps because the transaction is not good value for me. I withdraw my custom. The govt is free to do the same. If enough customers do this, either the price changes, competitors come in with a better offer or the business fails. The govt is, currently and thankfully, not in a position to say “well, yes I like your product/service enough to buy it but in addition I also want to impose a condition on what your staff are paid”.

Publicly-owned business (of which there a very few thankfully these days) are a different case. Taxpayer-owned brings different criteria.

It was this sort of thinking that put Labour in opposition for 18 years. I should probably stop discouraging you.

“Where did I say that private sector staff should be fired for the existence of poor incentive structures?”

You didn’t, nor did I. I said that we, the owners of the country, should fire those managers (the politicians and the bureaucracy) whose interests are not aligned with ours. As James Buchanan has pointed out.

As to the secdond point you make, yes, sure, agency problems. This is hardly new or novel. No, it’s not something that government will solve. For they, as above, face their own similar agency problems.

13. Sevillista

@Jim

Look at Somalia for an example of the utopia of rolling back the state to a complete minimum…

“Look at Somalia for an example of the utopia of rolling back the state to a complete minimum…”

Nope. Somaliland (or perhaps the other name, Puntland) is an example of a minimal State. Somalia is an example of an absence of one.

Somalia ain’t doing well: but Somaliland is doing better than when they has Said Barre.

Minarchists’ point there I think? A minimal state is better than a large and incompetent one?

15. Chaise Guevara

“Wait a minute though. No private Company could survive without society at some level or another. This idea that private companies are somehow out with the Country and exist in some kind parallel Universe is just nonsense. Every part of society relies completely on the other constituent parts.

How many business exist purely where no trace of ‘Society’ or the State exists?”

Well, what do you mean by ‘society’? People? Government? It seems obvious that companies are fully dependent on the former and probably flourish without the latter.

Also, a firm can engulf society, can be the same thing as the state. If you’ve got a totalitarian system under which everyone pays taxes to the Emperor so he can spend it on wine, women and song, you could call that a private company that is also the state.

16. Chaise Guevara

“You didn’t, nor did I. I said that we, the owners of the country, should fire those managers (the politicians and the bureaucracy) whose interests are not aligned with ours.”

But surely the work that these managers do needs to be done (in most cases, at least), and you’ve no way of knowing that the replacements won’t fall into the same bad habits as their predecessors. Isn’t the best approach to fix the incentive system?

17. Sevillista

@biffy

You said private sector organisations are not paid with taxpayer’s money
to make your original argument, so don’t get sniffy.

I’m not sure the argument you make is making a lot of sense. What is different about publicly-funded public sector jobs and publicly-funded private sector jobs that makes the pay of the former a legitimate target of your ire but the pay of the latter none of our business?

And while your ‘JK Rowling’ argument makes sense where there is a competitive market, most markets are to some degree monopolistic, leaving consumers little choice. If I want to travel to work in the morning I have little choice but to purchase services from Southern Railway, if I want to go shopping I have to shop at Tesco’s as everything else bar convenience stores has been driven out of business, if I want to fly I have to use an airport managed by BAA…

You need to get your thinking out of ideology based on theoretical predictions about perfect markets and think more pragmatically based on a real world in which ‘market failure’ is pervasive.

18. Sevillista

@TimWorstall

I know Somalia isn’t your utopia – I’m guessing more Buchanan’s vision with the state providing only defence (to protect the state and seek new markets), police (to protect property rights and crush social dissent) and a court system (to protect
property rights)?

Wasn’t Adam Smith very aware of the limitations of free markets and the need for state intervention in many situations?

19. Richard W

I don’t think using crude multiples of salary is particularly revealing of anything. There are many firms where high salaries inflated by bonuses are justified because performance targets were surpassed. It is high compensation regardless of performance that annoys me. For example, a couple of years ago the CEO of BT missed every financial target for the year and got a 700,000 GBP bonus.

Variable pay based on performance can be in the interest of everyone if there is some degree of restraint. However, in recent years too many further up the income scale have received compensation out of line to their workforce or performance would justify. Take Marks and Spencer as an example of back door wage inflation. In 2000, executive directors – including the boss – were entitled to a maximum bonus of 30 per cent of salary if they beat the targets set for them.

By 2005 that ceiling had risen to 150 per cent and is now 250 per cent. In addition, directors now receive a 60 per cent bonus for merely meeting their targets. The problem with that type of wage inflation is it is not being shared by all the workforce. FTSE?100 chief executives earnings have risen faster since 2000 than for the workforce overall – by 49 per cent versus 40 per cent. For M&S, the figure is 74 per cent.

As Tim W is so good at this, how many UK businesses don’t get some form of ‘Tax break’? Be that NI, or any other form of tax? Add into that, how many UK businesses get subsidies from the public purse?

When that is worked out, as any subsidy and tax break is taking from the public purse.

21. Biffy Dunderdale

@sevillista

You attempt to elide the very real difference between a company that has won contracts in the public sector with government departments, and not very well.

There are many differences but one of them is ownership. The govt dept is “owned” by the state and is therefore responsible for the running of it, its effectiveness, its value for money to the taxpayers (owners) and so on. A private company is owned by its shareholders. I would actually argue that too many institutional shareholders are supine and would welcome much greater shareholder activism. But that is because they are the owners of the enterprise and it is their responsibility.

Re: your southern Rail example – it is a poor example. 99.99% of private businesses are in a completely different situation than the handful of private companies that run rail franchises – and I wouldn’t argue that privatistion was done poorly.

And you don’t actually have to shop at Tesco’s. You could shop elsewhere but Tesco’s meet enough of your criteria to outweigh their not meeting some of your other criteria. As is the case with miliions of your fellow Tesco customers. If the balance was reversed, you’d be shopping elsewhere.

I do believe in free markets, largely for their track record in lifting the poor out of poverty around the world (a track record, incidentally, that is far stronger than “intervention” or, worse, socialism). and as part of that belief in free markets I recognise that monopolies are bad and that some regulation is needed to ensure markets remain as free and open to new entrants as possible. However, I also recognise that the only people I ever encounter who talk about “market failure” are generally those people who don’t believe in free markets anyway (so markets are always in failure according to them) and often confuse the term with the fact that the majority of their fellow citizens want something different to them – and then want to frustrate the majority. Market failure does happen, in rare and isolated situations. But since socialists have succesfully called 1,224 of the last 3 market failures I tend to ignore such rote declarations.

Tim waste of space blathering about his pretend Libertarianism again.
ZZZZzzzzzzzzzzzzzzzzzzzzzzzzzzzz

Here is an example of the kind of bullshit Tim believes in straight from the red states of America.

Are Democrats a party of parasites who give handouts to people who don’t work, by taxing those who do? That’s what farmer Donald Jungerman claimed when he put up a trailer along a freeway in Missouri with the words:

Are you a Producer or Parasite
Democrats – Party of Parasites

Well, it turns out that Jungerman himself got government handouts, to the tune of over $1 million!
After a story about Jungerman’s trailer ran in Sunday’s Star, however, some readers called him a hypocrite for criticizing others for getting government help while taking government subsidies paid for by taxpayers.
Jungerman said he put up the sign to protest people who pay no taxes, but, “Always have their hand out for whatever the government will give them” in social programs.
Crop subsidies are different, he said. When crop prices dip below a certain point, the federal government makes up the difference with a subsidy payment.

TimW @ 9

Arguendo: when BP pumps up oil in Alaska and sells in in Japan (as they do) what benefit do they get from the UK government?

Alaska and Japan still have societies and States (in this context) don’t they? BP still relies on societies based around would could be called a ‘Westernised’ liberal democracy.

Of course they could close down their entire infrastructure and move their entire operations to no State countries, but they will find that the internal market to be a bit stilted. No matter how you look at it, they have a vested interest in our Liberal Democracies existing in order to sell their oil to. The Saudis got very rich, not by selling oil to each other, but to selling it to the type of Liberal, decedant democracies and all it entails that they appear to despise so much.

BP et al do NOT live in a vacuum. Without our societies and environments to trade they would cease to exist.

@19
The problem with giving gargantuan bonuses to executives when performance targets are surpassed is that it’s very easy to surpass cost-saving performance targets (and increase shareholder dividends in the process). All one has to do is trim the workforce costs by a certain amount, either by outsourcing or by telling middle management to “maximise efficiency” with those that remain, or more bluntly – do more with less. This will work for a while, because the workforce who escaped the last axe will be bricking themselves at the thought of losing their jobs – doubly so in a recession – and will basically break themselves on the wheel to deliver the tasks they’ve been assigned. The only cost at this point is a demoralised workforce, and the bonuses will roll in.

Eventually though, they’ll cross the boundary at which more productivity can be squeezed from a pared-down and exhausted workforce, targets will not be met and if the situation is not rectified, some executives will be culled. However, almost all senior exec contracts in the Western business world come with a significant payoff on leaving the company for whatever reason. A famous example was Carly Fiorina, former CEO of HP, who essentially drove the company into a ditch with some incredibly poor decisions, but pocketed $20 million in severance pay regardless. She later moved into politics, running for the Republican Party.

What this means is that private industry executives in the West seem to feel that they can afford to be reckless because there’s no way they can lose.

If you want to see the idiocy of the ” WE HAVE TO PAY THESE HIGH WAGES TO GET THE BEST”

Look at the England football team, or the people running the banks, or the people running AIG. A monkey could have done better, and would charge nothing.

BP et al do NOT live in a vacuum. Without our societies and environments to trade they would cease to exist.

But, Jim – you have to remember that in the UKIP/Libertarian world it means nothing that other countries have different economic models – ever. The Libertarians say that the whole world should use their economic model. What that says for globalisation I will leave that up to Libertarians of each nation to tell us, but they do insist that there needs to be global trade.

What I do suspect is that they do live in a vacuum, certainly not in the real world.

27. Richard W

@ 9. Tim Worstall

” This idea that private companies are somehow out with the Country and exist in some kind parallel Universe is just nonsense. Every part of society relies completely on the other constituent parts.

How many business exist purely where no trace of ‘Society’ or the State exists?”

Arguendo: when BP pumps up oil in Alaska and sells in in Japan (as they do) what benefit do they get from the UK government?

And if no benefit, why does BP pay corporation tax to the UK government on oil they’ve pumped in Alaska and sold in Japan (which they do). ‘

A bit of a silly argument for you, Tim. The reality of BP, listing in London, their HQ here and paying tax to the British Treasury is their revealed preference. The reason BP do not up sticks to a lower tax jurisdiction is because they gain more from being based in the British state than the cost of the tax. There are many benefits for a company like BP to be based in the UK. Just one example would be large British businesses operating overseas going right back to the days of the British Empire have always received massive informal and formal assistance from the British state. It would surprise you how allied the British security services are with British business interests overseas, much more than other countries. BP in all their incarnations have probably received more from the British state than any company since the East India Company, hence why they stay here and pay tax on overseas earnings.

@ 24. bluepillnation

I am not really arguing in favour of ‘ gargantuan bonuses to executives ‘. I am just a bit skeptical that too much can be read into aggregates. Some large salaries could be deserved based on the performance of the company with the workforce sharing the increase in compensation. Others are undeserved, and it does not seem sensible to me to lump them all together. I don’t care what multiple of average earnings executives receive as long as it can be justified from performance and the rest of the workforce also share in the increase. The problem over the last decade with UK companies is the return from equities to shareholders have been dire but firms are paying themselves ever more for a worse performance.

Performance is more than cutting staff costs to boost the bottom line. Nowadays firms would rather fire workers than cut wages as cutting wages is usually counterproductive. For example, during the recession in the early 1920s, UK wages fell 30 per cent causing huge suffering. In both the UK and US, average wages have not fallen in any year since the Great Depression. So whatever individual firms have done it has not been a national phenomenon for 70 years.

“Wasn’t Adam Smith very aware of the limitations of free markets and the need for state intervention in many situations?”

“Many” would be social democracy which Smith wasn’t for. Replace that with “some” and you have classical liberalism. Something which both Smith and I am for.

The difficulty of course comes from the definitions of “some” and “many”.

“As Tim W is so good at this, how many UK businesses don’t get some form of ‘Tax break’? Be that NI, or any other form of tax?”

Eh? Tax breaks on NI? Not sure there are any.

“When that is worked out, as any subsidy and tax break is taking from the public purse.”

Noooo, a tax break is not a taking from the public purse. A subsidy is, yes (which means of course that everyone on benefits is making a taking from the public purse).

Think of corporation tax for a moment. Over the decades it’s swung about quite a lot: the headline rate has changed and the allowances against that (for investment, R&D etc) have continually changed. It’s the balance of the two which is the tax rate, not the one or the other alone.

“Alaska and Japan still have societies and States (in this context) don’t they?”

That wasn’t the question asked. Why does the UK government get a cut of it was the question asked.

“The reality of BP, listing in London, their HQ here and paying tax to the British Treasury is their revealed preference. The reason BP do not up sticks to a lower tax jurisdiction is because they gain more from being based in the British state than the cost of the tax.”

Fair enough: and what if their revealed preference changes? Like that of Shire Pharmaceuticals did, or W&P? Are they then going to be accused of tax dodging (as those companies were) or would you then say, well, gee, if BP’s revealed preference has changed perhaps we ought to be looking at the deal we’re offering to multi-national companies?

@27
I never grew up with a situation where wages were cut – you’re right – these days they just fire people (as I hoped was clear from my previous post). It’s still staffing cost-cutting though, and just as corrosive. The problem as I see it is “the rest of the workforce” barely shares the increase at all in a lot of cases.

33. Sevillista

@biffy

You confuse me with someone who is against the free market which I am not. I merely appreciate that very few markets are perfectly competitive (and there are also often issues with classical assumptions re consumer rationality and markets reaching equilibrium instantaneously). My preference is for free markets with state intervention at various levels to set an institutional framework in which markets can operate, resolve market failure and achieve equity goals.

As for your statement ” Market failure does happen, in rare and isolated situations”, come off it. It is the norm – all markets fail to varying degrees. Market failure, be it the existence of public goods, externalities, assymetric information, sub-rational behaviour by consumers or non-competitive markets is pervasive. Name any Market and I can explain the failures. In many of these, light-touch regulation is likely to be the answer, in others the Government needs to take a stronger role.

Back to the point re state control of private salaries, what is the difference between the Government purchasing, say, waste collection services from in-house LA staff and from Biffa that make the former the only justifiable target for wage control, given the LA staff have to prove they’re better VFM (at existing rates of pay) to win a contract under the Best Value framework?

Tim,

Noooo, a tax break is not a taking from the public purse.

It is to people who think our money is the state’s largesse.

“It is to people who think our money is the state’s largesse.”

I take it you educate your children privately and never use the national health service, and never drive on are roads or will be prepared to defend your little shit hole home from an invading army yourself?

You can always smell the fake libertarians.


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