Why Not A Maximum Wage To Reverse Income Inequality?

Many are comfortable with a minimum wage because it provides a floor which enables some to earn a subsistence wage.  If a minimum wage makes sense, why not use a maximum wage to reverse the inequality trend that is particularly acute in the US and the UK?  It is pretty clear that there is a market failure in the US and the UK because there is no reason to believe that these executives are more productive than those in other western nations.  Some of the issues that arise from this discussion are interesting.

One issue is whether there is really a market that determines CEO wage levels.  There may be no market failure if there is no real market in which corporate boards compete for the most productive CEO's on price.  The market for wages in most corporations is internal.  The share of wages going to top management is determined internally by corporate boards.  They justify their decisions by using compensation consultants who provide comparative data on CEO compensation in their industry.  Few corporate boards conclude that their CEO is not in the top quartile for their industry.

Some argue that shareholders should be more aggressive in limiting CEO compensation.  There are several problems with that suggestion.  CEO's receive most of their compensation in the form of stock option grants.  That was done in order to link CEO compensation to increases in shareholder value.  Moreover, Wall Street likes this arrangement.  The reports of their analysts have an important effect on the direction of a firm's stock price.  The criteria that they use to evaluate corporate performance provide Wall Street with a measure of control over corporate decision making.  For example, during the dotcom boom Wall Street analysts provided World Com with positive reviews because the CEO was serial acquirer of other firms. They earned huge fees from his business.  World Com failed and the CEO ended up in jail.  The Wall Street analyst did not go to jail.  The criteria used by Wall Street analysts today may have changed but CEO's are very sensitive to the short term performance goals that are in favor today. 

Since corporate governance is not likely to change, and the influence of Wall Street and the shareholder value ethic is very powerful, we cannot expect changes in CEO compensation to be modified by internal forces,  any changes will have to come from external forces.  The changes in CEO compensation may have been triggered by tax policies in the US.  A reduction in the top marginal tax rate may have encouraged CEO's to pursue higher wages, and the reduction in taxes on dividends, and on capital gains from stock sales, has also encouraged CEO's to promote their financial interests.  Some argue that more progressive tax policies might be the best way to reduce income inequality.  That may be accurate but it will be very difficult in our current environment.  The first problem is that corporate executives can direct campaign contributions to favored candidates.  The second problem is that nation states compete with each other on tax policy.  Corporate executives can, and do find ways to limit the ability of nation states to determine tax policies.