Manager Salaries — Who should set the limits?

January 23, 2012 — Leave a comment

This week a poll of the Swiss population found that 55% of people would favour a law that would limit the wages of top managers at firms to no more than twelve times that of the lowest earning employee – a 12:1 ration. And this week in the Swiss economics and finance magazine Bilanz, Klaus Schwab, founder of the World Economic Forum in Davos, said that he believes that top managers shouldn’t make more than 20 times more than the empolyee earning the least. The 12:1 bill was proposed by the Juso, but fell on deaf ears in Bern with the government not wanting anything to do with it.

However, the people could push it through as a People’s Initiative and pass this proposal into law. Such a shot would be like Wilhelm Tell totally missing the mark and shooting his son square in the head. A limiting of manager wages by the state would cause a mass exodus of work from the country and increase corporate fraud.

Let there be no mistake, the initiative has its virtues and does address a very major problem, which is the growing gap between the rich and the poor. In many countries it is a gap that most are too ignorant to acknowledge. Look at Governor Mitt Romney in the USA claiming to be middle class and Swiss billionaire chemical tycoon Christoph Blocher saying he represents the average Swiss person. Meanwhile the working poor are too busy working to feed off the scraps and empty promises thrown to them by the top earners to understand how the system is not in their favour. All that said, we in Switzerland still have it better than in many other countries. But rest assured that if some have their way with the Euro crisis, Europe — Switzerland included — will start to head further down the North American road to anti-prosperity.

Now let’s look at the idea of legally forcing companies to limit what they pay their managers. As I stated above this idea has a rational basis, but has not been correctly thought out. First off, it could mean that companies move to places where such laws do not exist. In today’s world people and capital can travel freely — that’s why Switzerland is still doing relatively well. Because the USA and many European countries supposedly tax too high. If companies don’t leave then they’ll look for other ways of getting the money to the top managers in bonuses, allowances and other dubious means, which surely will also escape taxation. So this is not a good idea. However, the argument being put forth by many business experts that there are no qualified people that would do the job for less is blatantly absurd.

If anything a company that would make it its own policy to not pay their top manager more that 12 or 20 times that of the lowest paid worker would probably have a better management than it would with managers being paid at the extreme ends. At 600,000 francs a year the manager is still not earning peanuts. And he would feel more responsible to his company to ensure that it does well in the future.

Lord Acton once wrote in a letter to Bishop Mandell Creighton in 1887 that “Power tends to corrupt, and absolute power corrupts absolutely.” The same goes for money. Money is an invention that allows us to turn things and skills into common tradable units. Most often it is related to time, the one thing all humans are given. As soon as ones wealth is in a vast disproportion to the number of hours they have to work or even live, there is the potential for that person to believe in a sort of immortality — power and be corrupted. The same is true on the other end of the scale as well. People who do not have enough money and no way of trading their skills or products for other items can also be corrupted.

When a manager does his or her work for the money alone, they are doing it for the wrong reason and will harm the company they are working for in the long run. This is a reason why respectable companies need to individually limit their managers and employees. Better yet would be managers and employees who can limit themselves.

For those interested business, management and economic theory Fixing the Game by Roger L. Martin (ISBN: 1422171647) gives some very interesting insights into how in the longterm shareholder value maximization has actually produced less returns than the pre-1976 business theory.

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