A Cap on High Pay is a Cheap Vote Winner

Last Updated Aug 17, 2009 9:08 AM EDT

Curbing pay is the new battleground of Britain's politicians. Threats by Conservative shadow chancellor George Osborne to block big bonuses for bankers have been echoed by the Liberal economic spokesman Vince Cable and bettered by Labour's Treasury ministers. It is an unhealthy consensus.

Undoubtedly many bankers received undeserved rewards and many maybe were motivated by bonuses to take risks that threatened not only their own jobs and employers but the wider financial system. But creating a High Pay Commission to set maximum wages is playing to the gallery rather than adding to public debate.

The best hope is that the proposals prove so impractical that legislation is never passed. The worst fear is that they become law and demonstrate the impracticality.
Governments have interfered with remuneration previously, from pay policies holding down workers' income in the national interest to minimum wages to raise workers' earnings. It may well be in the national interest to restrain bankers' rewards, but ministers should be careful in meddling with how private companies pay private individuals.

At a practical level, when so many of the City's investment banks are foreign-owned, how would a UK politician tell an American firm like Goldman Sachs what to pay its London staff? At an economic level, not only would bankers take their talents to countries with less punitive pay regimes, the banks would follow.

And at a management level, if the law holds down top pay, what happens to employees in the middle ranks? All businesses -- not only banks -- have a hierarchy of rewards in which the sales manager earns more than the sales assistant and the sales director more than the regional sales manager, right up to board level.

Capping the pay of senior staff reduces the differential with lower ranks, removing any reason for middle managers to seek promotion and eliminating the incentive for top executives to work at capacity.

The debate now may concern only bankers' pay but if one part of business is shackled the calls will come to include all directors. Yet if top pay is curbed, then remuneration right down the hierarchy needs to be trimmed too -- even though politicians would then be upsetting the middle orders whose votes they are seeking to woo by humiliating their superiors.

Bashing bosses is grandstanding with the intention of winning the votes of millions of minions while alienating only the elite -- most of whom may vote for another political party anyway. Higher taxes for those earning over £150,000 have a similar appeal among the masses and complaints by the oppressed minority carry no weight -- indeed, the louder the squealing, the more popular the measure.

But an economy needs wealth-generators and such people like pay -- just like politicians like strong economies. With such accord this really should not be a battleground at all. And if a general election was not imminent the parties might concede pay is a matter for the market instead of seeking to outbid each other in punishing bankers.

(Pic: yachtfan cc2.0)