Saturday, April 22, 2006

Organization Pay Ratio Limitation

This week's idea is a socio-economic idea, not a political one. Here I'm looking at an idea to reduce the financial disparity in society. Today the majority of wealth in the world is concentrated in a relatively very small number of people. For example, Bill Gates has a net worth of 51 billion US dollars. I on the other hand have a net worth of maybe 3000 US dollars (and I'm counting on a good exchange rate to get that high). That's six orders of magnitude difference. The gap between the rich and the poor is expanding at a rapid rate, and those on the poor side are finding life harder and harder. Now I don't think I'm entitle to a share of Bill Gates bank account, but I do think that certain roles in society are being compensated much more generously than others.

Within a company, or indeed an organization, there are many people doing many different things. Some people do the menial jobs, some do more skilled work that varies with what sort of business it is, and then there is management. As you work your way up the ranks, the amount you earn increases, as do your responsibilities and the expectations upon you.

In many cases though, the amount of compensation that the highest ranked employees get seems excessive and that on top of a straight out pay packet, they get numerous other fringe benefits, stock options and other forms of equity, as well as generous severance packages that get paid regardless of their performance.

On the other end of the scale, the people who do the menial work are often paid at minimum wage levels, which in some countries is not sufficient to make ends meet. If missing work due to sickness means you can't pay your rent then you're not earning a living wage. Everyone should be able to find some means of employment that provides them enough money to live at a certain standard that includes essential health care, a livable home, sufficient food and clothing, and a few other basic essentials (power, phone, maybe minimal internet, etc).

So on to the idea. Establish a restriction on pay within a company or organization so that the highest paid person cannot earn more than a certain amount more than the lowest paid person, ie, the highest paid person can only earn up to 125 times as much as the lowest paid person. At the moment I doubt any company would meet this requirement, and so if it were to be enacted there are two ways a company can approach the restriction. First they could reduce the amount the highest paid people are paid. This is unlikely because of the people who'd be making the decision are going to be the highest paid people. So then there's option two, which is to increase the amount the lowest paid people are paid. It would probably be very expensive to just raise these payments, as there would need to be a wholesale restructuring so that there is still some motivation to be a qualified programmer over a cleaner or what not. So the more likely outcome is a compromise between the two, so that the highest payments go down and the lowest payments go up.

The exact ratio would take a bit of working out to get right, I just picked 125 because it sounded reasonable. I think the value should be between 100 and 1000, but I'm not sure where exactly. Perhaps there should be a scaling factor based on the size of the company.

Then there is the question of what should be taken into consideration when evaluating someone's income. I'm for any form of compensation, be it direct pay, fringe benefits, stocks all being taken into consideration. Another issue would be companies hiding payment details of the highest paid people, much as wealthy people now have tax minimization strategies, but that would then be financial fraud, and when found should be treated as such, and since publicly traded companies need to comply with numerous financial regulations, this would be another for them to work with.

Another issue could be with companies outsourcing certain aspects of running the business. Cleaners hired by the company would need to be paid more than a smaller company could charge the business to do the cleaning for them. Actually, that is a big loophole here, as a company could just insist that all employees actually become contractors with their own small businesses that are contracted to the main company for much less than they could pay someone.
Some might say that this is an unfair burden on corporations, and that they should not have to subsidize the poor, etc. But this is not subsidizing people that they are not involved with, this only affects how they treat the people working for them. It is similar in aim to minimum wage laws, and is only different in how it sets the minimum amount, allowing companies to decide
just how much they value the contributions of each level of it's staff.

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