I read with interest Mark Flowers’ article on maximum wage differentials, and it got me thinking that instead of arguing for the implementation of a minimum wage system in Singapore, we could instead explore the opposite: a maximum wage cap on how much the top executives of corporations and companies can make vis-a-vis the wages of the lowest paid workers.
I, for one, am never a fan of minimum wage systems for a number of reasons: the greatest being that empirical studies in the US and Europe have shown that contrary to popular social beliefs, minimum wage systems have actually served to be more detrimental to the plight of the low income groups. In actual fact, minimum wages have caused a host of problems including a more pronounced income gap, and higher unemployment rates.
I get it: it’s a very romantic Robin Hood notion of taxing the rich to redistribute to the poor in the form of wage subsidies to support the minimum wage. But in this highly globalized day and age, what’s likely to happen is you start to crowd out potential investments into your country because you would have effectively inflated labor costs, instead of what it would have been if left to market demand and supply forces.
On the other hand, while it may seem counter-intuitive to some, having a maximum wage policy could serve as a better answer to addressing income gaps — especially in affluent societies like Singapore.
Consider the mechanics at play for a maximum wage policy: you start by dictating how much more the top executive of a company may make as a factor of how much you compensated the lowest-paid worker(s). Say we set that factor at 20 times — this means if the lowest-paid worker’s annual salary including bonus incentives and other benefits was set at SGD 18,000 (that’s SGD 1,000 per month for 13 months, plus another SGD 5,000 inclusive of the 20% CPF employer’s contribution, insurance and health benefits), then the highest amount the CEO may make is SGD 360,000 p.a. That’s already higher than the current median annual compensation of Singaporean CEOs at SGD 246,922.
Of course, we could set in other parameters in deciding the factor, for instance, having a range of factors that’s commensurate with the size of employees in the company, which logically follows that the factor for a company with 20 employees would be lower than that of a company with 1,000 employees.
What have we achieved here? For one, I agree with Flowers that in all likelihood, we have given CEOs an incentive to expand their businesses, instead of being overly-focused on enhancing shareholder returns.
CEOs who wish to get a raise will want to expand their businesses so they can afford to give raises to the people at the bottom of their pay structure.
Our current system of compensation for executives and managers benefits only the shareholders of the company, and is not equitable in the sense that there is no real incentive for CEOs and Managing Directors to think of ways to enhance the value of their businesses (which is very, very different from share price valuations).
John Spedan Lewis said, “Capitalism has done enormous good…but the perversion has given us too unstable a society. Differences of reward must be large enough to induce people to do their best but the present differences are too great.”
So we’ve seen Wall Street CEOs of hedge funds and private investment banks being paid 500 to 1,000 times more than the lowest paid employee in their organizations. How high, then, should we set minimum wages, and how much more do we want to raise taxes to address this grossly-skewed difference?On the other hand, a maximum wage policy may not be foolproof, and we cannot totally eliminate income gaps obviously, but at least we are able to say, “hang on, paying yourself a million dollars a year when your lowest paid employee only makes $20,000 a year is simply too much”. I really can’t fathom how one can justify such a huge difference in salary gaps, but therein is where a maximum wage system makes sense: you have to first justify why you had to be compensated so highly in the first place, and saying you make your shareholders happy isn’t going to bite.
Flowers’ argument was that the maximum wage differential system has already proven to work in Sweden and Denmark. I think the message is clear — it’s equally applicable in Singapore as it is anywhere else in the West, and while we aspire to attain a Swiss standard of living, it would help if we first strived to achieve a Scandinavian standard of income distribution.
The causes which destroyed the ancient republics were numerous; but in Rome, one principal cause was the vast inequality of fortunes. — Noah Webster (1758–1843)