Posts Tagged 'High Earners'

The Establishment of a High Pay Commission

By Aine Walsh, Communications Worker with EAPN Ireland

Recent studies (Wilkinson and Pickett, 2009) have highlighted the negative effects of unequal societies on both our health and psychological welfare: the wider the gap between high and low earners the greater the prevalence of social unrest and disenchantment in a society.  The net result of that unrest and disenchantment is profound and disturbing: mental illness, the rate of imprisonment, levels of obesity and murder rates are all five times higher in the most unequal societies when compared to the least unequal. As Irish levels of income inequality are incrementally increasing it is important that we take a comprehensive look into this issue, with a view to suggesting workable solutions.

One hundred years ago, business guru JP Morgan stated that the difference between high and low pay should be no greater than 10%. He argued that such a differential is enough to create motivation for advancement.

A 2009 Behaviour and Attitudes Poll commissioned by TASC found that 85% of adults believe the government should take steps to reduce income inequality.[1] Income inequality in Ireland is in fact increasing, for example the richest group faced lower prices in June 2009 than July 2007, whilst the poorest and median group faced higher prices, as deflation is commodity specific.[2]

A recent survey in the UK highlighted the lack of informed knowledge that many people have surrounding this area; firstly, 79% of the population place themselves as middle income earners, thus indicating that the average income is a figure which most people are not aware of, with many high and low income earners placing themselves misguidedly in this bracket. Secondly, this falsehood was also shared by the wealthy (those earning over £100,000) who believed the average UK wage to be double the actual figure.[3] The creation of a High Pay Commission could help alleviate these misconceptions and address the dearth of information.

One solution that has generated considerable international debate is the mooted introduction of a High Pay Commission, which would be tasked with carrying out an in-depth analysis of income inequality in the Irish private and public sector. The rationale for creating a High Pay Commission is twofold; to increase public knowledge about inequality and to propose workable remedies to income inequality and its effects.

In effect the idea is to put a ceiling on what people can earn; a maximum wage. The concept of such a body is not entirely without precedent. Indeed the Irish government established a similar, albeit on a smaller scale, initiative to investigate and provide recommendations on how to reduce the levels of high remuneration prevalent in the Public Sector. Various actors in the UK have also been debating the possibility of a High Pay Commission and the proposal did attract some attention at the outset of the last general election campaign (Lawson 2010). Ultimately a High Pay Commission would propose a comprehensive set of joined-up regulations to tackle excessive pay.

How the Commission would work

The task before a High Pay Commission would be to investigate possible reductions in the top earners only in order to create more income equality.  The establishment of a High Pay Commission would also address the dearth of information on income inequality and its negative effects on our society. Without better information on high pay we can’t tell its effects on, for example, Ireland’s competitiveness. The High Pay Commission could also look into the possibility of tax reforms which would create further redistribution of wealth from those on a high income to the lower earners.

It is important firstly to ensure that the composition and structure of any Commission itself is sound in order to ensure viability and effectiveness. The UK organisation Compass, which is the force and catalyst behind a demand for the establishment of a High Pay Commission in the UK, has outlined the basic structure that such a body might adopt. This includes the creation of balanced Commission, led by a Director, under the instruction of a Chair and a small number of Commissioners, backed up by an expert panel of independent advisers. The High Pay commission should also be furnished with a detailed and accurate account of the economy and our economic outlook, which should be contributed to by the Department of Finance but also other expert bodies and academics in order to receive a balanced and broad perspective. The Commissioners should be broadly representative of civil society, including from the financial and business sector, organised labour, a relevant academic or economist, a journalist and a community and voluntary sector representative. The task of the High Pay Commission would be to examine existing data, commission new research, conduct hearings and test the resulting recommendations with interested parties. Their overall aim would be how best to reduce excessive risk and rewards in the medium to long-term.

TASC has argued that there are two available methods to reducing the wage gap; firstly through progressive taxation on income and wealth as is used in Sweden, the second is to have smaller differentials in income and wealth before taxes which means there is less need for redistribution, as is availed of in Japan.[4] This report also notes that preventing excessively high incomes and wealth at the top is just as important as raising incomes at the bottom.

International practice

An example of how such a structure of more equal pay could be introduced into the Irish system is demonstrated by Sweden, a similarly small economy which has successfully introduced a more equal and non-market orientated wage structure.[5] In Sweden this has resulted from an egalitarian wage structure, promoted by the Trade Unions over the past fifty years. This is a good example of the positive welfare effects of more equal distribution as chosen by workers. Government social transfers account for a much higher percentage of GDP in Sweden and Denmark than countries such as the US and Ireland. Nordic countries also tax the benefits paid out more extensively than other countries, a policy which hurts the poor very little as the tax rate tends to increase with household income.[6]

The Australian government’s Productivity Commission published a report in January 2010 entitled “Executive Remuneration in Australia; Inquiry report”. The aim of this was to examine the trends in remuneration in Australia and internationally, the types of remuneration being paid, to whom, and the relationship between remuneration and corporate performance.[7] This report also sought to; assess the effectiveness of the current framework for the oversight and transparency of remuneration, consider any mechanisms for aligning better the interests of boards and executives with shareholders and the wider community, examining the effectiveness of international responses to this issue in light of the financial crisis, and finally, providing recommendations on how the existing Australian framework governing remuneration could be strengthened.

The US has also undertaken steps in pursuit of a more equal and stable society. For instance Barack Obama has introduced individual salary caps of around $345,000 per year for those working in institutions which have received government support.[8]

A motion brought before the UK Parliament in November last year succinctly highlights why the creation of a High Pay Commission is essential;[9]

That this House believes that the Government should establish a High Pay Commission to examine the effects of high pay on the economy and society; acknowledges that over the last 30 years median earners have seen incomes increase at less than the average while the super-rich including UK chief executive officers have seen their pay increase to 76 times that of the average worker; notes three main concerns over the effect of high pay in Britain: the link between excessive pay and the financial crash, the questionable link between economic performance and high pay and the social effects of inequality due to the increase of wealth concentrated at the top of society; and calls for a public inquiry to bring all of the facts, evidence and arguments into the public domain.”

Conclusion

A myriad of possibilities for reform therefore exist, simply waiting to be explored and tested by an investigative body such as a High Pay Commission. Although the form, structure and reliability of the High Pay Commission is important, what is most essential is that some form of review is undertaken into this issue and presented to the public and our representatives in government.

Overall, an Irish High Pay Commission should aim to; encourage the retainment, recruitment and motivation of high calibre people whilst remunerating them more appropriately; increase the public’s knowledge on inequality through the publication of a regular report; investigate and relay best practices from other jurisdictions; investigate the feasibility of creating a more Nordic style system of redistribution in Ireland; the creation of legislation on this issue; and list recommendations for the reduction of excessive remuneration.

It is therefore to be concluded that a High Pay Commission is necessary. It is recommended that such an investigative body be created; charged with reviewing our high pay culture, the effect this has on society and what steps can be taken to create more positive changes. This is an issue which is adversely impacting upon the lives of every Irish citizen and thus requires the utmost attention.


[1] McDonough, T., “Hierarchy of Earnings, Attributes and Privilege Analysis”, TASC, 2009, p.2, available at  http://www.tascnet.ie/upload/file/9644%20HEAP%20BOOKLET(1).pdf, accessed July 2010.

[2] Jennings, A., Lyons, S and R.S.J. Tol, “Price Inflation and Income Distribution”, ESRI Working Papers No. 308, August 2009, p. 3, available at http://www.esri.ie/UserFiles/publications/20090804111315/WP308.pdf accessed June 2010.

[3] Aoronovitch, D., “Spare a Thought for the Undeserving Poor”, Times Online, August 2009, available at http://www.timesonline.co.uk/tol/comment/columnists/david_aaronovitch/article6799645.ece , accessed June 2010.

[4] McDonough, T., “Hierarchy of Earnings, Attributes and Privilege Analysis”, TASC, 2009, p.2, available at  http://www.tascnet.ie/upload/file/9644%20HEAP%20BOOKLET(1).pdf, accessed July 2010.

[7] Australian Government Productivity Commission, “Executive Remuneration in Australia; Inquiry Report”, available at http://www.pc.gov.au/__data/assets/pdf_file/0008/93590/executive-remuneration-report.pdf , accessed July 2010.

[8] Compass, “Never Again”, Direction for the Democratic Left Limited, p.9, available at http://clients.squareeye.com/uploads/compass/documents/Compass_NeverAgain_lowres_webready_V2_1.pdf , accessed July 2010.

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