Saturday, November 23, 2013

On a "Maximum Wage"

The Swiss are voting on a referendum to limit executive pay to 12x the pay of the lowest paid employee of the company. It's a popular socialist position recently, to attempt to keep compensation levels from getting too imbalanced, and encourage corporations to raise minimum wages. In the US, for example, CEO's can make well more than 100x the amount of the lowest paid workers in the same company, and that creates large wealth disparities.

Somewhat surprisingly, I find myself in cautious agreement with the concept. I've been thinking about a similar thing recently, and here's what I would propose for the US.

First, we'd need to establish some definitions of compensation. To that end, let's say that compensation includes all salary, benefits, bonuses, and other indirect compensation mechanisms (eg: stock options) given to an employee. Furthermore, let's say that for part-time employees, annual compensation is calculated to be their effective compensation extrapolated to a 40-hour work week (eg: if they received $20,000/yr for working 20 hours/week, that's $40,000/yr compensation).

Second, let's allow for some additional disparity as companies grow; after all, its more work to manage larger enterprises, and there are typically more layers of management. To that end, let's say the baseline business is any one with less than 100 employees, and for larger businesses, you have a "size factor" which is equal to the log(base 10)(x) - 1, where 'x' is your number of employees. So 100 employees is a size factor of 1, 1000 is a size factor of 2, 10,000 is 3, etc. (and fractional factors are fine).

I would propose that, for all corporations, the maximum compensation for any person is limited to (10 * (size factor) * (lowest compensation)). So, some examples:

  • A 50 person company, lowest compensation of $30,000/yr, max of $300,000/yr
  • A 1000 person company, lowest compensation of $30,000/yr, max of $600,000/yr
  • A 50000 person company, lowest compensation of $30,000/yr, max of ~$1,110,000/yr

Penalties for violation of the law would be equally simple: a complete forfeiture of all compensation in excess of the limited amount, assessed at tax time. There would have to be a few special-case rules to address some corner-cases for abuse (eg: deferred compensation until all employees are gone), but those are easy enough to address. It also doesn't address the issue of wealth disparity through initial ownership of corporations, but perhaps that's not appropriate to legislate. Indeed, the idea of legislating compensation limits itself makes me somewhat uncomfortable, but on the whole (and if done correctly), it doesn't seem like a terrible idea.

Anyway, chalk this opinion up to my minority liberal side, I guess.