I was reading Matt Taibbis most recent blog post, and I feel moved to build on his points.
America is losing its competitive edge. There are a lot of reasons for that, but one if them is almost certainly the fact that we pay our highest wages in nonproductive sectors like banking, and to nonproductive roles in business. This draws the proverbial “best and that brightest,” away from science and industry and into fields dedicated to money for its own sake. We have placed the incentives for talented young people almost exactly wrong, and our society is falling behind as a result of it.
I understand the values that banking and finance bring to an economy. I also understand the value of a skilled executive team at the top of a large business. There is nontrivial benefit to a robust lending market, to accurate valuation, to accessible capital for businesses, to strong accounting and auditing practices, to good management, and so on. However, we need to acknowledge that (as Iain M Banks said in Feersum Endjinn): “People said they made [money] work for them but money cannot work, only people and machines can work.” Unless banks and management build on an actual ever-increasing store of value produced by human beings, then any profits derived from banking are hollow at best and theft from society at worst.
The same is true with executive compensation. My belief is that there is no person who is worth a salary more than tenfold greater than the lowest paid worker in her organization. This is because there is no executive who could produce a car, a phone, or even a sack of fertilizer without the combined labor of their workforce. Certainly they multiply value, but multiplying any value by zero (the business without the labor force) doesn’t get you far. Leadership relies on labor. Compensation, in a fair world, would reflect that reliance. Similarly, banking relies on society as a whole. When banking becomes an extractive enterprise and a supposed profit center in itself, something is terribly wrong.
If we set the hourly wage at, say, $10 (a little above the legal minimum but it makes the math simple) and the work week at 40 hours, then a worker who puts in her time on the job will gross about $20,000 per year. That’s not a lot. If we say that housing ought to be about a third of your annual budget, they’re contributing perhaps $500 to the rent. A hard worker, taking extra shifts and working nights and weekends can perhaps double that to $40,000. A two income family can push even higher, though they will incur other costs along the way. Let’s assume that our notional hard-working executive works just as many hours as that hard working laborer (bullshit). Under my system, they can earn a nice salary of $400k. That’s pretty good all around. Additionally, if there are profits left over because the company is well run, then perhaps their share of the company increases in value.
I’m not setting limits on compensation and I’m not advocating any sort of handout. All these people work hard. I’m setting limits on the ratio of compensation within an enterprise. I trust the market to work out an equitable balance between competing companies, and I trust the government to break up monopolies that interfere with that healthy competition.
Alternatively, that executive could take the Back Street Boys road to riches: Create a product that several million people want to buy, and get a few bucks from each of them. I.e: Don’t manage, produce. Don’t “create jobs,” but actually do one. I sort of like the incentives there.
As a society, we attract people to various roles by means of certain incentives. Money is a major one of those factors. I think that we have set up a system where many talented people waste their lives dithering with other people’s money and telling people what to do, rather than advancing society.
We don’t need more managers and bankers, we need more inventions and brilliant engineers. If we want to attract those people, we should pay them banker wage, and pay the bankers by the hour.