I can thank Liberal Vision for alerting me to the Compass Campaign about High Pay.  Vince Cable is signed up.  I like Liberal Vision - it is good to have an blog pushing their line without the sometimes unthinking dogma that goes with the Adam Smith institute or the IEA blog. But unlike Liberal Vision,  I don't think that the ever-escalating ratio of executive to average pay deserves a big "so what"?  Yes, the idea of the government determining who is worth what is odious, and potentially dangerous.  But that does not mean that executive pay is a functioning market.  As the FT reports today:

"Politicians and investors are concerned by a long-term trend towards high pay for executives against that of most workers. Incomes Data Services says average pay of chief executives of FTSE 100 companies, including options and incentives, rose 167 per cent to £2.4m between 2000 and 2008. The median pay for full-time employees rose just 32 per cent to £25,000 in the same period."

Anyone who has been in business knows of useless executives that get high pay because their position rather than their contribution makes it possible. As I have written before, pay outcomes are not all a straightforward consequence of the market smoothly allocating rewards to economic merit.  The exercise of power in some form or other enables the high paid to 'rent-seek', whether they be bankers or Tube drivers.   Shareholders surely understand that they have a major coordination problem here - a classic Prisoner's Dilemma, whereby it would make sense for pay over the whole universe of high-paid executives to fall by 50% (with little impact on economic efficiency), but the temptations to welsh on agreements will make this fail. 

I don't have a neat answer to this, but unlike LV I do think there is a problem.  It is one reason I like progressive taxation.  As pay rises, the extent to which the employee is able to gain rewards through rent-seeking rather than entrepreneurial innovation rises (think Microsoft Windows).  Expecting a roomful of bureaucrats to determine the exact division of merit is impossible.  But the notion that  the more you get, the more rent you have been extracting, is a pretty good rule of thumb. 

I am personally sceptical that high pay caused the financial crisis: it is more of an epiphenomenon - the crunch could have been caused by people being paid half as much (in fact, incomes data suggests that every single financial crisis before this one must have been caused by people being paid a half, or quarter, as much).  A letter asks the really interesting question: why are banking profits so high - what has happened to the principle of competitive erosion of profits here?  The fact that employees rather than shareholders collect so much of this is secondary in this industry, although still interesting. 

Larry Elliott (see last post) should look at this graph from Krugman.