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High pay: what Machiavelli would have recommended a politician do

It's true that high pay for bosses serves no purpose except keeping them (and their headquarters) in the country. The only real solution is economic policy coordination. In its absence, Machiavelli would have been proud of the proposals and statements on display this new year in the UK
Tony Curzon Price
Tony Curzon Price
9 January 2012

The story told in economics 1.01 about the market for work is that you pay more to get more out of people. The usual thought experiment is in terms of hours worked -- "yes, OK", I'm meant to say to myself, "I will put in that 66th hour as long as I get £25 for it".

It's is obviously a very poor description of reality - it is hard to think of a single job market where that ever happens. In the job market for top jobs - much in the news since David Cameron's indication he'll put in place policies to curb top pay - the more likely story is a complicated monopoly: there are a fixed number of top jobs to be filled; directors - charged with filling them - try to get people whom they won't look stupid for having appointed; if you're a person who passes that test, you know that there are likely to be fewer of you than there are top jobs, so you've got all the power in the compensation negotiation. No surprise you extract eye-popping pay deals.

This is a simple and plausible story that doesn't even require the back-scratching cronyism that everyone quotes so much - "Remember, my friend, when you set my pay, that tomorrow I'll sit on the committee that sets your pay ... " That probably happens, but I am sure the greater force of power is monopoly.

So when Stuart Fraser, policy chairman at the City of London Corporation, speaking on the BBC's Today program this morning argued that: "bosses are just like footballers or media stars", an embarrassed John Humphreys didn't have much come-back. He limply offered "yes, but footballers get high pay for goals scored..." (I'm no football expert, but presumably footballers in defence get high pay too). And anyway, JH, what is the "goal score" on the Today program that justifies your pay, whatever that might be? Why not simply recognise that these are all cases of monopoly, and we should have wide discretion on how to deal with them?

Why this blind spot on a simple problem of monopoly? Why not just say: "we're over a barrel, and we have laws to deal with this sort of thing..."

Because the embarrassing truth is that national governments really are pretty powerless here. Companies and bosses will move - look at WPP's Martin Sorrell, who seems to move himself and his company from this tax jurisdiction to that at the drop of a penny, as it were. Top bosses who extract mega-deals are precisely the people who need lots of money; the modern corporation is a machine finely evolved to entrap these people. They will move. And national Treasuries will find that their tax farms become less productive: for them, there is a real social choice, in a world of fleet-footed elites and national states, between being fair and being flush.

In other words, expect bluster and not much action on top pay. Not only are national states powerless, but they certainly don't want to loose their milch cows. Macchiavelli would have been in no doubt: announce a reform that will plausibly take a few years to take effect (as this one will, since it will not impact old agreements); when it is clear after a few years' wait that the reform has been designed to be toothless, hope that the economy is booming again and people don't care or, in extremis, scapegoat the foreigners and start to tinker again.

The solution to the problem is obvious enough. Economists have a wholecupboard-full of recommendations of what to do with monopolies of every shade. One simple and obvious policy would be to impose a high tax rate on very high salaries. It may not be the best, and we should welcome all the economic thinking into even better solutions. But what all the solutions presume is executive agency. If someone can easily side-step your policy, there's no point even formulating it.

Paul Ormerod suggests that the British government should act in the symbolic realm - refuse honours, nice invitations and all forms of social approbrium to the arm-twisting monopolists. That seems sensible, if rather weak - how much is a knighthood really worth to most long-toothed corpocrats? Their status comes precisely from their job and pay.

International policy coordination would do it. A G20 agreement to enforce the robber-baron JP Morgan's rule that no company chief ought to get more than 20 times the salary of the lowest paid would solve the problem. So if we want a real solution here, we first need to transform our democracies so that they will deliver this sort of international coordination and agreement.

Thank you to Sodahead for the giant octupus picture

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