Ethics @ Work: Maximum wage - an idea with minimum merit

April 21, 2006 06:00

Why might someone think that capping the earnings of the wealthiest individuals would be a good idea?

keynes 88

keynes 88. (photo credit: )

Just this week, a reader told me that he especially likes my column because it highlights the complexity of controversial issues and shows there is generally much merit on both sides. While I almost always do take sides, in the end it is more a question of "preponderance of evidence" (the judicial standard for winning a civil case) than of "proof beyond a reasonable doubt" (the standard for criminal conviction). Inspired by this support, I am going to exert myself to give a somewhat balanced discussion of an idea that I believe has no merit: a maximum wage. I've heard this idea batted around in Israel before but I never thought of devoting a column to it, because I assumed that only a few crackpots were serious about it. But, in the last few weeks, I see worrying signs that this idea may be taken seriously and, so, I feel obligated to explain what is at stake and why I think that any move in this direction would be a grave error. Why might someone think that capping the earnings of the wealthiest individuals would be a good idea? Here's what the great English economist John Maynard Keynes wrote 70 years ago: "I believe that there is social and psychological justification for significant inequalities of incomes and wealth, but not for such large disparities as exist today." Explaining why disparities are necessary, he continues: "There are valuable human activities which require the motive of moneymaking and the environment of private wealth-ownership for their full fruition. Moreover, dangerous human proclivities can be canalized into comparatively harmless channels by the existence of opportunities for moneymaking and private wealth, which, if they cannot be satisfied in this way, may find their outlet in cruelty, the reckless pursuit of personal power and authority, and other forms of self-aggrandizement." However, Keynes acknowledges: "But it is not necessary for the stimulation of these activities and the satisfaction of these proclivities that the game should be played for such high stakes as present. Much lower stakes will serve the purpose equally well, as soon as the players are accustomed to them." In other words, the highest paid executives are not working their 100-hour weeks year-round for the villa in Europe, which they barely have time to enjoy - they are doing it for the power and prestige that their salaries represent. They would work equally hard for a smaller sum if this sum bore the same degree of cachet. I have little doubt that this is true, just as basketball players would sweat just as hard if a field goal was worth one point instead of two. This facile analysis, valid as far as it goes, provides only the flimsiest basis for implementing any concrete income capping policy. Even Keynes was not in favor of this, he was only advocating an estate tax, which I also favor. After all, "lowering the stakes" doesn't mean putting a cap on them, it merely means moderating them somewhat. Furthermore, it may be true that executives would work just as hard for lower stakes, but their talent would not be efficiently allocated. An executive with unique, worldclass talent might still be driven by temperament and pride to work 100-hour weeks, but if her salary couldn't be bid up, she probably would be doing so for a medium-sized local business instead of for a gigantic multinational where her talent might be worth billions of dollars more to the economy. More fundamentally, I question the fairness of such a policy. I recognize that a degree of equality in material enjoyments is a valid ethical desideratum, but allowing people to enjoy the fruit of their labor is no less an ethical axiom. If someone is worth five million dollars a year but we pay her only one million dollars simply because we can get away with it, this is a kind of exploitation that needs some compelling justification, which seems to me quite lacking. Even if I were to acknowledge (perhaps under duress) that a wage cap could be desirable, I would certainly never acknowledge that it is practicable. There are so many ways of getting around such a cap (stock options, bonuses, pensions etc.) that it would be easily circumvented, at the cost of adding new layers of obfuscation and cynicism to executive compensation in this country. And even if it were practicable here, we need to recognize that it's a big world out there. If one tiny Middle Eastern country puts a cap on wages of its most talented and productive citizens, these individuals can easily find golden opportunities elsewhere, and are well justified in doing so if their native country decides arbitrarily to place a 100 percent income tax on any earnings over a certain maximum. Any government intervention in free exchange needs to have some kind of convincing benefit, and the idea of a salary cap involves a significant degree of intervention while the policy itself is certain to be extremely destructive. I have written in the past that the best solution to exorbitant executive pay is to increase transparency in compensation. Putting a statutory cap on the payment of any kind of managerial talent is certain to have exactly the opposite effect, namely, to encourage opacity and subterfuge. It would introduce a new and completely ineffective layer of bureaucracy whose effect would be to deprive executives of the fruit of their labor, keep them from using their talents to best advantage, and create a massive and absolutely justified drain of managerial talent to abroad. Anyway, I don't believe that the motivation for a wage cap is based on anything nearly as sophisticated as Keynes' analysis, which in itself provides only the flimsiest basis for policy. I think that the ultimate motivation for the policy is a small-minded and grudging attitude towards success. A recent edition of Mabat showed the usual pre-Pessah food distribution to poor families in an impoverished neighborhood where most adults do not work. This was followed by an indignant recitation of the huge salaries of some of Israel's leading executives. The producers of the show were trying to make it seem shameful to be earning millions of dollars a year in a country where others were dependent on food parcels - as if these managers were stealing the food from the mouths of needy individuals. I'm not really a big fan of shaming blameless people on national television, but if we are going to play this shabby game I think it would be equally justifiable to confront the people accepting the packages and ask them if it isn't shameful to be living on charity (whether privately or publicly provided) when there are other individuals whose productivity contributes millions of dollars to the national economy and to the national treasury. All in all, any kind of wagecap scheme would be what my mother used to call "cutting off your nose to spite your face" - wreaking havoc on the economy merely in order to spite our most visible managers, the public face of Israeli business. There are a lot of executives out there who are worth their exorbitant-sounding salaries. It is true that there are also a lot of executives who are taking shareholders for a ride. But the solution to this problem is improved corporate governance and greater transparency in executive compensation - not a small-minded and narrowminded policy of arbitrarily denying people the ability to negotiate generous payment for their ample talents. [email protected] The writer is research director at the Business Ethic Center of Jerusalem (, an independent institute in The Jerusalem College of Technology. He also is a rabbi.

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