Tuesday, February 7, 2012

Rule of Ten: How to rid capitalism of huge inequalties


Rule of Ten for greater Equality


Do you know?

That Chief Executives of many corporations make in a month what the lowest paid worker of the same organization would make in a life time (Thirty to forty years of work life)

With the legally binding rule of ten in place, it becomes in the interest of company bosses to increase minimum wages within their organizations to the extent possible, or their own wages cannot be increased, while making it impossible for them to collect huge and obscene compensations. All that is required is a simple law that prescribes the maximum permissible ratio between the highest and lowest compensation that any organization or corporation may have.

Recently there has been a hue and cry about the high salary and bonuses that some corporate executives, especially bankers are drawing. The occupy movement that has erupted in many countries around the world represents this anguish of people. New sources of communication make expressing the anguish public, yet there is a simple way to fix the problem if people can compel ruling politicians to make required changes before it becomes too late even for that. It is called the rule of ten here. If adopted such a rule will not only strengthen non-exploitative capitalism while ending the exploitative kind, it will also strengthen democracy. When capitalism is the benevolent kind, inequalities reduce, when it becomes exploitative, inequalities rise. It seems that in the largest economy of the world, USA, inequalities have been rising for more than three decades now (see this report)

Capitalism is not always exploitative as some claim because the same report shows that inequalities reduced in the period prior to 1978 and everyone got richer. However, for capitalism to continue in a benevolent manner checks have to be put on excess of greed. Unlike lust, the Lord has not put an automatic safety valve to greed that puts an end to lust at a certain peak value. Greed on the other hand, without checks, can grow infinitely, growing stronger with each level of attainment, until it sucks the life blood of society and destroys what it is feeding on, like a horde of marauding locusts that stays in a green field until every thing is wiped out, when people are told to eat cake if they cannot find bread or when a Castro or Lenin arrives to banish the czars.

Simply stated the rule of ten states that within any corporate or government organization the cumulative annual benefits (that include salary, bonuses, shares and all other benefits) of any individual within that organization shall not exceed  a legally prescribed and defined ratio of the total benefits of the lowest paid individual. This will immediately put a cap to the high bonuses and perks some individuals are enjoying in various organizations while compelling them to increase wages of the lowest paid in order to maintain their own high wage. The rule has to be corporation wide not country wide in order to allow corporations to compete and also because the financial conditions of businesses vary. The rule shall be applicable to include severance and retirement benefits too.
The rule of ten is simply a way of stating and ensuring that a sense of balance and proportion is maintained when wages and compensations of employees from top to bottom are decided within an organization. This rule would not have been necessary if organizations and businesses did it on their own but very few do, rather many have begun to violate it massively especially over the last three or four decades.

Rule of Ten
It may be noted that with the rule of ten in place it becomes unnecessary to prescribe minimum wages. They rise automatically to the extent the finances of a business permit. The basis of this rule is that no individual is less than ten times as capable, hard working or talented than the most capable individual in any organization. In case he or she is, he/she should be in a care home instead. It is only just that the salary structures reflect this reality. Some number such as 10, 12, 24, 30 or even fifty has to be chosen and a round number is simple to implement. The real and evident reason for these gross inequalities is that those with advantages have exploited their positions to maintain their advantage since the dawn of human civilization, to different extents at different periods of history. The present one is particularly bad with less than 100 humans owning a wealth equal to that of half the humans on the planet as per reports from Oxfam International..

No doubt, if instituted, corporations would devise ways to get around this rule but it shall be a beginning and in any case it will make the kind of rip offs possible now impossible.
Countries not used to this sort of rule will find it rather extreme, but they can make a beginning by a  less severe ratio then 10, say 50, even 100  to prevent a few individuals from ripping off the voiceless shareholder and the shirts off the back of the poor and pushing some corporations to the point that they require a bail out from public funds. Under the present rules of the game nothing prevents corporate bosses from walking away with hugely unfair compensations and indeed some such thing is happening in many places.

Extracted from: The Pinch of Poverty by Thomas B. Kennington


How will such a rule strengthen democracy? If a referendum is to be called for such a law, an overwhelming majority shall support it. Any rule or law that is in accordance with the just aspirations or wishes of the people and is workable strengthens democracy. What about the argument being put by some bankers etc. that this will lead to a flight of talent. That is just nonsense but if there is capital that leads to exploitation of 99 percent of people it is best that it flees and flees fast.
Such a rule will not lead to a flight of talent or capital that benefits society as a whole although it will lead to the flight of talent and capital that destroys society out of greed gone haywire. It shall lead to a flight of greed and exploitation instead.
What will happen to the campaign contributions of political candidates if some individuals and corporations are not allowed to get disproportionately rich? No just human society needs campaign contributions that ride on the back of the homeless and the struggling while the likes of Berlusconi have perhaps taken off to their island spa for another bunga bunga party. Quite likely he has enough room for other leaders to join him as other economies around the world collapse under the burden of debt.
Unless the presently prosperous economies of the world take steps towards abolishing exploitative minimum wages and limiting high executive rip-offs both two sides of the same coin along with irrational debt, they appear headed for economic doom. Current measures as being adopted around the world only kick the can down the road, a road in which the pits get deeper as one moves further.
A year or so ago when the CEO of a Swiss drug major was walking off with a 78 million severance package, as approved by a board of directors whose compensations he had approved (it is the you scratch my back, I scratch yours story in corporations) the Swiss public woke up and forced in a new law to prevent this sort of rip offs by companies. The legislators cried foul and the companies cried foul but the public had their way because of the unique sort of democracy the Swiss have. In other countries the public does not have a similar say.
The rule of ten is far more business friendly than increasing minimum wages because a  struggling business can then survive lean periods by cutting salaries across the board until it recovers which is not possible with regulated minimum wages and at times when no job is available even a low paid one is better than being kicked out to homeless street.
Many Slaves at work make many dollars for a few rich persons
NOTE: A less severe version of the rule of ten is one applied to ratios of maximum to average salary in place of minimum salary within organizations. Such a rule also controls runaway compensations but does not contribute as much to automatic increase of minimum wages.



UPDATE  NOVEMBER 2013 : 
This post and its reprints elsewhere on the net has resulted in the Swiss 1:12 initiative presently underway and scheduled for a vote this Sunday. The design of flag for their movement has been inspired by the logo in this post. Understandably there is much opposition to it from the same quarters that uphold the 1 per cent dominance in the world and it is possible that it may not win just right now but it is clear that the idea has arrived. Similar moves are underway in other nations too, albeit in their infancy just now. Read more about this here: 
http://someitemshave.blogspot.in/2013/11/how-this-blog-is-helping-to-change-world.html

While the Rule of ten prevents a few in control of corporations from exploiting its employees and share holders, it does not prevent a corporation from exploiting the society at large. For that we have the rule of ninety described here - http://someitemshave.blogspot.in/2014/06/rule-of-ninety-step-towards-reducing.html
The rule of ninety prevents corporations automatically from becoming too big to fail unless they are working for public good, prevents excess profiteering and encourages competition.

16 comments:

chandra bhanu rastogi said...

thank you for describing this rule as still most of the corporate owners are unaware of these types of useful, balancing and important rules.

ashok said...

You are welcome Chandra. I think corporate owners are aware od such balancing but they would not wish to do it unless compelled by law.

Vincent said...

Well I agree that the rule of ten would be a good idea. I do think that if we had a referendum on the issue here, it would pass. However in the UK there is no obligation to hold a referendum on any issue unless it's a constitutional one. Obviously an opinion poll could be conducted but that is not how democracy works here.

I quite agree that bankers do not have to be personally greedy, though their job is all about maximising return on investment, for everyone's sake and not just their own.

I was impressed recently by an interview with a very rich banker. He's a devout Christian with a strongly moral viewpoint. He gives away more than 90% of his personal income on philanthropic projects. He felt it was a moral issue and had certain reasons for not imposing a rule such as you propose. I can't remember what the reasons were.

However, popular opinion is having an effect in UK, with a growing number of high-paid top executives starting to refuse certain bonuses.

So the pressure of publicity may achieve something that legislation cannot do immediately.

ashok said...

Thanks Vincent. I think some countries like Sweden already have a severer rule and they are doing quite well.

Historically persons in position of power have allocated an unfairly large amount to themselves. Democracies changed that a bit but not enough. The new iternet revolution is widening the debate and making it more democratic. Hopefully it will lead to a fairer world with time. I am quite optimitistic that it will.

Vincent said...

There is a particular difficulty for the UK. The London Stock Exchange and more generally the financial district in the small area known as the City of London constitute a very important, and probably disproportionate source of the UK's GDP, and therefore pay a lot of tax to the British Government which is heavily in debt and anxious not to avoid the deep troubles of European countries.

The problem is that if UK high-mindedly makes a law corresponding to the Rule of Ten, it threatens one of our biggest industries and puts the whole country at greater risk. Or so I am told and have no way to refute the argument.

It is similar in a way to another moral dilemma constantly facing the UK: its arms industry. It is one of the biggest manufacturers of weapons and ammunition. There are laws in place to prevent armaments being sold to regimes which might employ violence against their own people. I think laws have been passed against the supply of landmines because they might endanger life and limb of innocent civilians for years to come.

I am not taking sides, don't have the wisdom of Solomon: just pointing out some of the complexities.

Vincent said...

Correction to my first paragraph above. Please ignore the word "not".

John Myste said...

The basis of this rule is that no individual is less than ten times as capable, hard working or talented than the most capable individual in any organization.

In America, some people in the workforce are more like a 1000 times more talented than others.

Anyway, I have a problem with the Plutocracy America, for example, has become, a real problem with it. However, I don't think we should cap incomes that way, nor do I think it is democratic to do so, nor do I think in America, such a referendum would pass. I am quite certain it would not.

However, I do think we should tax income very progressively, which would have similar effect, just not as pronounced.

The Heathen Republican said...

Hi Ashok, three points:

1) "Simply stated this rule states that within any corporate or government organization the cumulative annual benefits (that include salary, bonuses, shares and all other benefits) of any individual within that organization shall not exceed ten times the total benefits of the lowest paid individual."

But what if one person provides more than 10x value to the corporation? I don't mean by some subjective measure, but by any objective measure. For example, if one salesperson sells 15x as much stuff, why shouldn't she make 15x more in compensation?

There are, of course, other measures of value besides sales. For example, a corporate executive who improves efficiency or closes multi-million dollar acquisitions.

Perhaps then your argument is that if we want to pay that executive $1 million, we need to raise the salary of the person emptying the trash to $100,000, but is the person emptying trash cans providing $100,000 of value to the organization?


2) "How will such a rule strengthen democracy? If a referendum is to be called for such a law an overwhelming majority shall support it."

Perhaps you can describe this as democratic, but majority rule has the danger of trampling on the rights of the minority. The minority has rights that the majority can't infringe on (speech, religion, etc.) no matter the number of votes.

Do we really want a majority of voters to determine how much private corporations can pay employees?


3) "Such a rule will not lead to a flight of talent. It shall lead to a flight of greed and exploitation instead."

Perhaps not, but it will lead to a loss in productivity. Consider the salesperson who sells 15x more than another. Once she reaches 10x, why would she do anything else until the next calendar year since she'll earn no more for her effort? If you think this isn't realistic, you don't know salespeople who, in every case I've seen, knows their compensation tables by heart.

The Heathen Republican said...

One last point, which is more of an unintended consequence. If you got your wish, with a democratic vote and an actual rule that required all corporations to adopt the Rule of 10:

A) Compensation experts would find new ways to compensate executives. For example, how do you value a stock option? The price at award or the price at sale? How is the lowest employee compensated when the CEO's stock is held for 10 years?

B) Accounting costs and penalties would go up, much like what we've seen with Sarbanes--Oxley.

C) Employees at the lowest end (e.g. those emptying trash cans) would lose their jobs or be moved into part time work. They would be replaced by outside contractors not subject to the Rule of 10.

ashok said...

Heathen good to see you and John back on an issue that you both feel passionately. I comletely agree with your statement,

"Compensation experts would find new ways to compensate executives"

However, it would not then be as easy to do as now and not so extreme hopefully.

One difficulty with humans has always been that the powerful tend to misapropriate a larger share of benifits. In dictatorships like we had in Libya its just the dictator, his family and few friends. In democracies too some such thing goes on amongst a larger number of persons.

You say that an executive adding 1000x of value should get 1000 times the salary. Sure that is correct but does he really add 1000x of value. He would add nothing without the help of the others lower down. The entire organism works together. Its like saying the computer monitor should be most expensive although its nothing without the smallest chip in the comuter. More likely the CEO says he adds 1000x value because he has a powerful say in the board room.

You are right that a majority can trample on the rights of a minority in a referendum. That is the reason I qualified my statement with words like Just etc. as regards a referendum.

The masses feel that some persons, dictators, kings or a group of cororates and their political friends have misappropriated a disportionate portion of their wealth that belongs to everybody and would like to see a more even distribution. The communists went too far by trying to equalise it all. This rule of ten does not suggest equalising welath but it does suggest making a more reasoable distribution of salaries. Presently some bankers who have destroyed the value of their banks rather than add to it have taken millions as a bonus.

ashok said...

Vincent,

Your argument is precisely what the rich bankers put forth. They say that if salaries are capped the most talented would leave. My own impression is that there is no dearth of talent available at lower salaries.

ashok said...

John, a company would not pay 100,000 dollars to the trash boy because the chief got a million, because others in the company would then have to be paid more than a 100, 000 each and they would not be able to afford it. More likely the board would reduce the salary of the chief to a quarter million so that the new trash boy could be hired at 25 thousand dollars a year just a little above the minimum wage stipulation. Nevertheless with the rule of ten in place organizations and their chief would be compelled to ensure that no one is grossly underpaid in their organization.

If I was paid a quarter of a million a year in the US, I would pay 80,000 a year as taxes, live on 45 thousand a year so that at the end of two years I could buy my own swanky apartment or a suburban home for quarter of a million rather than rent one. At the end of another eight years there would be a million in a stupid bank that paid no interest. More likely I would buy 20-acre farm with cottage from a third of it and gold biscuits from another third and keep just a third in the bank so that if the bank collapsed at the end of ten years because the government defaulted under a debt burden I would not loose my money (in that case the gold would shoot up to compensate).

I think I would be fully satisfied with that kind of compensation. More would make my mind foggy with greed. Lust, greed, fear and anger are emotions that do that to humans without fail besides neat scotch on the rocks.

John Myste said...

I do not believe that anyone who earns 250,000 in the U.S. pays 80k in taxes, but I understand your basic point. However, if you cap someone’s income as you suggested, the most talented people would choose a different career or do business elsewhere. They would be a fool to work under those conditions. I say this as staunch liberal.

ashok said...

John, What is the approximate average tax for a quarter million earned as salary in the US? I was just guessing what it might be when I quoted my figure.

ashok said...

My guess was estimated from the sort of tax I pay on my book royalties earned in the US.

Ashok said...

This note was updated somewhat today and a link to another recent note on rising inequalities added. A reader who likes the idea, as 99 percent should, please share and tweet to spread the idea for a fairer, more equitable world. Thanks