Executive Pay

There is something approaching a consensus that executive pay is too high, And the behaviour of Crest Nicholson shows that the corporate sector is in no mood to give an inch.

There is support for various ideas; higher minimum wage, pay ratios, binding shareholder votes . . . and more. Some voluntary. Some legislated. However, maybe now is a good time to take more fundamental look.

All the proposals that I have heard accept the fundamental basis of capitalism, as if it were some fundamental force in the universe. It is not. It is a result of the rules that we make and it is time to examine the rule that shareholders are entitled to ALL the profit that a business makes.

Value in any business derives from; capital, labour and scarcity. Scarcity would be things like; mineral rights, technology, brand, intellectual property. It seems to me that the owners of capital are entitled to a return on their capital, but a return on the labour of their employees as well?

The rules as written just now allow for labour to contract with an employer, and they get what they negotiate. The problem with that is that it is not a fair negotiation, with the glaring exception of the senior executives who are doing a prodigious job on their own behalf. How about if the profit left after the shareholders have had a reasonable return on their capital was distributed amongst the workforce. John Lewis in the UK might be a suitable model.

And why would any company do this? The executives making these decisions will clearly not be trousering quite the packets they do today if a significant amount of the profit is going to the workforce. They would need to be encouraged; and I would think that a different corporate tax structure, for a business with this kind of structure in place, would do the job. It could be entirely tax neutral, with a slightly lower tax arrangement for such companies being offset by a slightly higher tax arrangement for companies with the existing remuneration structure.

Maybe we need other changes as well, but Capitalism is failing and we do need a fundamental re-think.

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