Gareth Morgan says the focus should be to fix the inequality of opportunity. We need to lift the poor, not play the politics of envy

By Gareth Morgan*

There has been much talk of the obscene amounts of money some CEO’s are earning, both here in New Zealand and abroad.

Some have even suggested the idea of regulating CEO’s pay packets in an effort to reduce inequality.

Firstly let’s deal to the idea of regulating the pay packets.

Regulating CEO pay packets

Any government around the world would be completely bonkers to put a cap on what an executive can be paid.

For starters it would be unenforceable. Remember the days of ‘amateur’ rugby, when no-one got paid to be an All Black? Yeah right.

Businesses found ways around it, hence we got the phrase ‘shamateur’.

If the regulations were enforced, they would end up driving talent overseas. Some may say ‘no loss’, but many studies show New Zealand has enough problems attracting good managers as it is.

The demand for talent is what drives CEO packets and put simply if you want good leaders you have to pay for it.

But are CEOs worth it you ask?

Who is most likely to know – certainly not the voting public. At the end of the day that is up for the shareholders of a business to decide.

If the owners or board of a business don’t get a return on investment from the compensation packages they put in place, than that is entirely their problem.

On the topic of inequality

There is no point trying to fix inequality by dragging down the rich.

That is just the politics of envy.

Instead we need to be lifting the poor. 

As we mentioned in our post on the state of inequality in New Zealand the other day we have different types of inequality.

If you are worried about CEO paypackets then you are focusing on inequality of income.

In our view this is the wrong lens to be viewing this problem. 

The problem with talking about inequality of income and wealth is that it implies equality is the aim. Clearly in a capitalist society this isn’t the case – most people don’t have a problem with people being rewarded for working hard and getting ahead. That is the obvious problem with the byline for the Spirit Level: “Why More Equal Societies Almost Always Do Better”. Actually, no, that couldn’t be more wrong, the most equal societies (the communist ones) failed. 

So, assuming society is bound to have some inequality in wealth or income, how much should worry us?

At what point do the pluses outweigh the minuses? We don’t really know.

These questions plague the inequality conversation, including defining the ‘poverty line’, which is usually set as an arbitrary proportion of average income.

Surely we want to make sure that the poor have enough to participate. That is the approach taken by the Nobel Prize-winning economist Amartya Sen. Granted, what is needed to participate in society will change over time as new technology becomes available, but it seems to make sense to focus on giving everyone the basics they need to get ahead.

That is why here at the Morgan Foundation our view is that it’s inequality of opportunity that is the real issue, rather than inequality of income or wealth. 

That means we should be focused on making opportunities available to all members of our society, rather than fretting about the gap between the rich and poor. 

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This article was first published on the blog garethsworld.com and is re-published here with permission.

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11 Comments

... maybe we should not assume that people who we classify as " poor " have always been in that state , or that they will always remain " poor "
 
Is there a survey outlining migration of families within the wealth classes ? ....
 
... Gummie's only seen USA data , which shows that wealth is highly mobile , and that many families are rising up , at the same time as others are sinking in wealth ...

Actually no, the US looks to be stratifying....born rich, stay rich....born middle class stay so unless you get a medical problem and go bankrupt.   Also a degree now in the USA almost doesnt pay back in higher salary gained from it.
regards

No to regulation, if shareholders Ok it and are that dumb, good luck to them.
regards

steven, remind me how small shareholders can influence executive salaries? The fundamental problem is small shareholders have been disenfranchised by executives who run listed companies as their own personal fiefdoms with the aid of complicit directors and remuneration consultants.

I can't decide if the team at Interest is trying to be ironic by using that Gordon Gecko pic or if the irony is lost on them. I suspect the latter.

We get the irony (in a couple of ways). Actually, the pic is as supplied by the author.

Oh ok didn't realise that authors would supply pictures of that type when submitting articles. Sorry for the false accusation =)

Sometimes they do, sometimes they don't and we select. In this case, we had permission to reproduce from Morgan's blog, and that pic was the one he used on his publication.

Is it just me...
Or when we're talking people with nice houses and little income GM wants to tax the blighters into obscurity

yet when it's fat salary packets it's "fully justified"

If CEO's and other top execs were in fact chosen on their merits and actual "talent" I would be on board with all the rhetoric. But reality is that it runs very much on that old chestnut, not what you know but who you know. Family and old school buddies will get there every time.
Stupid situations exist such as the NZ lotteries commision where no talent is required to simply distribute the funds collected to worthy organisations, yet enormous executive pay is somehow defended on this "talent retention" argument.
When selecting the board and management, all voting options are restricted to those hand picked by the power brokers and lobbyists, simple competency only is required to remain in place until the power balance shifts and the board and management is overturned. That is how it works.
My suggestion is to index the complete executive packages to the lowest paid in an organisation including all supply chains. Either the top gets hauled into line or the bottom is brought up, your choice. Of course there will be attempts to subvert this but this should not be the reason it does not be done.

Start with the CEO paypackets for parastatal enterprises like Auckland Transport and Auckland's Watercare