There has been much talk of the obscene amounts of money some CEO’s are earning, both here in New Zealand and abroad. Some have even suggested the idea of regulating CEO’s pay packets in an effort to reduce inequality. Firstly let’s deal to the idea of regulating the pay packets.
Regulating CEO pay packets
Any government around the world would be completely bonkers to put a cap on what an executive can be paid. For starters it would be unenforceable. Remember the days of ‘amateur’ rugby, when no-one got paid to be an All Black? Yeah right. Businesses found ways around it, hence we got the phrase ‘shamateur’. If the regulations were enforced, they would end up driving talent overseas. Some may say ‘no loss’, but many studies show New Zealand has enough problems attracting good managers as it is. The demand for talent is what drives CEO packets and put simply if you want good leaders you have to pay for it.
But are CEOs worth it you ask? Who is most likely to know – certainly not the voting public. At the end of the day that is up for the shareholders of a business to decide. If the owners or board of a business don’t get a return on investment from the compensation packages they put in place, than that is entirely their problem.
On the topic of inequality
There is no point trying to fix inequality by dragging down the rich. That is just the politics of envy. Instead we need to be lifting the poor.
As we mentioned in our post on the state of inequality in New Zealand the other day we have different types of inequality. If you are worried about CEO paypackets then you are focusing on inequality of income. In our view this is the wrong lens to be viewing this problem.
The problem with talking about inequality of income and wealth is that it implies equality is the aim. Clearly in a capitalist society this isn’t the case –most people don’t have a problem with people being rewarded for working hard and getting ahead. That is the obvious problem with the byline for the Spirit Level: “Why More Equal Societies Almost Always Do Better”. Actually, no, that couldn’t be more wrong, the most equal societies (the communist ones) failed.
So, assuming society is bound to have some inequality in wealth or income, how much should worry us? At what point do the pluses outweigh the minuses? We don’t really know. These questions plague the inequality conversation, including defining the ‘poverty line’, which is usually set as an arbitrary proportion of average income.
Surely we want to make sure that the poor have enough to participate. That is the approach taken by the Nobel Prize-winning economist Amartya Sen. Granted, what is needed to participate in society will change over time as new technology becomes available, but it seems to make sense to focus on giving everyone the basics they need to get ahead. That is why here at the Morgan Foundation our view is that it’s inequality of opportunity that is the real issue, rather than inequality of income or wealth.
That means we should be focused on making opportunities available to all members of our society, rather than fretting about the gap between the rich and poor.