Unintended consequences of reducing corporate pay

 A couple of thoughts written in January 2008, languishing in the 'drafts' folder...

• If companies anticipate a future rise in taxation, it makes sense to bring anticipated future bonuses forward, before the rise comes into effect. This could lead to a vicious circle, where high bonuses begets threats of tax rises, which produces high bonuses
• Salaries reflect many aspects of productivity, and one that is often forgotten is "compensating wage differentials" - pecuniary rewards to offset undesirable aspects of the job. Consequently the greater the stigma and public derision attached to a job, the more we'd expect (i) the wage rate to rise; (ii) or else an adverse selection issue, where only those who don't mind stigma want the job. Either way, the more that newspapers demonise "fat cats", the more they have to be paid, and the more likely that unsavoury people want the job

I was interviewed by The Sunday Times yesterday on the public sector pay cuts, and my main argument was that it's economically illiterate to make across-the-board pay decisions. If someone's worth more than £150k a year, pay them. The problem is that in the public sector generally, it's harder to establish someone's "market rate" (by definition). I also made the point that compensation comes in many forms, and salary is a transparent way to entice employees. If you take away the ability to pay large salaries, you'll (i) channel compensation into other forms (e.g. a nicer car, offices, or status quo); and (ii) make it harder to see who's performing well. I'd like my students to know how much I get paid to direct their studies - that way they can judge whether I'm good value.