Income Gap- Here We Go Again

Apparently, there is a movement in Switzerland to limit executives pay to 12x what the lowest paid employee makes at the company. Here is one article discussing this, and here is an even creepier article by John Sutter hoping this movement will spread to the United States.

I have to write this post- I think many people will get suckered by these types of proposals. Plenty of normal folks can’t imagine the salary some of these executives make. It is true that some of them make so much money they could never actually spend it. Most won’t even notice the large hit to their wallets. However, limiting their pay is a terrible step towards socialism.

Proposing to limit salary is the refusal to admit several truths:

1. You can only receive the salary that someone else is willing to pay you. When I want my taxes done, I take it to my tax professional and she tells me how much her services will cost. The amount of her fee is based on her own personal calculation of what her time is worth for this chore. I analyze the total cost and decide if that is worth in terms of my time, and thus decide if her offer is higher or lower than what I am willing to pay. You do this process at every purchase. Limiting salaries is a way to say either a) the top people can no longer decide what their time is worth or b) the bottom workers must be paid more than the task is worth to the top people. The solution to the first problem: quit. Now, a successful executive has quit and been replaced by a less successful one. That’s great for business, right? The solution to the second problem: fire workers and do it yourself. If that mental calculation you do to determine the value of a good or service is now lower than what is being charged, you refuse the good or service, and make do without. It’s a no-brainer. You do it every day.

2. Wealth is not a pie. I’ve discussed this in several articles. The whole purpose of this approach is to have a regulating body divide up the resources of the world equally among everyone. While that may sound noble, think about what that means. As long as someone does not have, you cannot have. If there is one person starving, you should not eat. Instead of turning these executives free to make as much money as they can, you shame them for any penny they make, because somewhere out there, there is a someone without a penny. Keep in mind though, wealth is not a pie. The same number of gold atoms are in the world since the caveman times, but our standard of living is significantly better than those days. What happened? The value of each person’s time increased as our lives became better. We got to spend more time on leisure, live longer lives, and spent less time freezing to death and dying of disease. Each inventor, each artist, each scientist, and so on that improved our lives did so- for a fee. Instead of being limited, they are free to collect as much as they want, and you are free to decide whether you are willing to pay that fee to improve your life, or whether your life is improved by not paying that fee. Each time you enter a voluntary exchange, BOTH OF YOUR LIVES IMPROVE. You got some trinket that improved your life, and they got money to buy trinkets that improve their lives. Wealth grew.

3. Executives, janitors, bankers and football players are not exchangeable. You cannot simply replace an executive with a janitor and expect a successful company. Businesses that grow do so because of the vision of the people at the top and the support of people at the bottom. However, one of these is easier to replace than the other. Sure, we’d all like a chance at $52,000,000 a year to try to run a business. That doesn’t mean we would be qualified to do so, or would be any more successful than the last person to crash a multimillion dollar business.

That may be a lot of gibberish, so I decided to make a football analogy. You own a football stadium. Your team has a star quarterback. You have a parking lot with parking attendants at each home game, including a very good parking attendant. Which are you worried about quitting your organization? If the parking attendant leaves, it is unfortunate. You may have lost out on a good employee, and should have tried offering him more money. But life will go on, 99% of your fans will still show up at the game tomorrow, and eventually, you will replace the parking attendant. If your star quarterback leaves, what happens next? Maybe your team doesn’t win as many games. Maybe, next year, less fans show up to watch the game. Which was a bigger deal- losing the parking attendant or losing the star quarterback? Which one will be more easily replaced?

It would be bad enough to lose your star quarterback. Now instead of hiring another quarterback, pretend someone else has arbitrarily said “you can only pay him this much.” How much harder will he be to replace now?

4. The worst part of all- the danger of this entire proposal- is that once you “confess” their right to set your maximum salary, the number or ratio they use will be irrelevant. Today, maybe it is 12x the lowest paid employee. Then, there will be sob stories about the lowest paid employee again. Next time, the rally cry will be 10x. Then 9x, 8x…2x, 1.8x and so on. It sets an incredibly dangerous precedent.

In our football analogy, a star quarterback will be valued at the same salary as a parking attendant. Games will be terrible, until there is no money left to support them. The football stadium closes, and the quarterback an the parking attendant are without a job. Now, expand this to all industries. Think the janitor should make as much as your open heart surgeon? Expect no more open heart surgeries.

But what about our executives? Who cares? Can you manage that much money? Can you handle decisions to expand or contract the business? Can you seek out target markets successfully? Likely, you cannot. Shouldn’t they be paid what they are worth?

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