Next step after MPs’ salaries: pay ratios?

Yesterday’s announcement by John Key that, in future, salaries for MPs will rise only in line with salaries for ordinary public sector workers is a big deal for two reasons.

First, it provides more evidence that the public is very concerned about inequality in general, and high salaries in particular. Key has made noises about dealing with the MPs’ salary issue before, but never acted. That he is doing so this time shows the growing scale of public disquiet on the issue.

Of course, MPs’ salaries (at around the $150,000 mark), though large, are nowhere near as big as those of private sector chief executives, say, who in New Zealand can earn $3 million-$4 million. Since CEO productivity is about as hard to gauge as that of MPs, and their remuneration therefore equally difficult to justify, you have to wonder when more attention will turn to the private sector. Still, a focus on the public sector is fine for the moment.

The other interesting thing about the Key announcement is that it implicitly endorses an important concept for reducing inequality: pay ratios. The idea behind pay ratios is that the pay of an organisation’s highest earner should be no more than, say, 12 times that of the lowest paid earner.

Key’s announcement will fix MPs salaries at roughly, I would guess, five times that of the lowest paid public sector worker (assuming they are currently on the minimum wage of approximately $30,000), and his own $430,000 salary at approximately 15 times that of the lowest paid worker. (What is an appropriate ratio is of course up for debate. A future government might legislate to reduce that ratio to, say, 12 to 1, so that the PM doesn’t earn more in a month than anyone in the public sector, or elsewhere, does in a year.)

With this principle established, it could be extended elsewhere: to public sector chief executives, for example, some of whom earn over $600,000. And, as above, the real issues with higher pay are in the private sector. So we might see some of our biggest companies adopting pay ratios – or being encouraged to do so by activist shareholders. Now that would be a step in restoring fairness to the economy.