Sunday, December 04, 2011

We need a free market to determine boardroom pay

Back in the 1970s pay of rank-and-file the public sector was often decided by committees. Following a strike or the threat of  a strike, a committee of the good and the great would be convened to decide what people engaged n a particular trade or profession should be paid. Invariably, they recommended a substantial increase.

Nowadays that is pretty much how pay for executives in the private sector is decided. A committee considers ponders the questions and comes up with the recommendation that they should be paid much more.

Just as Mrs Thatcher's governments introduced market discipline for the workers, the Coalition needs to introduce it for the bosses. The idea that unless you pay a run-of-the-mill British chief executive a huge salary he or she  will be poached by a company in the USA or Japan is nonsense.

It is equally nonsense, incidentally, to believe that council chief executives will depart for the private sector unless you pay them twice what the prime minister earns.

All this is by way of saying that I welcome Nick Clegg's statement this morning that the government will:
announce plans to "get tough" on excessive boardroom pay in January and may legislate if necessary.
How keen our Conservative allies will be on such measures remains to be seen, but if they really support the free market they ought to support them.

4 comments:

Simon McG said...

What makes you think there isn't a free market at the moment?

dreamingspire said...

The free market (and we do have one in total board room remuneration) is metastable, that is it sits on a peak, always in danger of sliding down into chaos. The higher the peak, the greater the danger. And don't be misled by a market driving towards cheap prices made possible by poor products - that's a different kind of peak, but its still a peak. The correction mechanisms for the current boardroom remuneration peak should be threefold: public opinion, further moves by govt to tax the remuneration, and (bolstered by statute) more involvement of both the whole of a company's employees and its shareholders in fixing remuneration (the German model).

Jonathan said...

Simon: I suggest you read the post

iain said...

the German co-determination model is not a radical as the old Liberal Party policy of co-ownership and employee ownership. It would be good to hear Lib Dems advocate a change in the model of ownership to embrace those ideas once again....