A common practice in cooperatives (especially large, complex ones like Mondragon) is to establish maximum pay differentials between the lowest-paid worker and the highest-paid manager. In Mondragon, for example, it was agreed from early on that top-level managers would not receive more than three times the remuneration of shop-floor workers. In some of the Mondragon coops, this ratio has been relaxed (it is as high as 1:9 in a few 'high-tech' coops, and in some cases even higher if you count contracted professional services), but it is still worlds apart from the gaping inequalities observed in conventional firms, wherein managers are paid up to 400 times as much as the average (not even the lowest-paid) worker (see 'Thing 14' of Ha-Joon Chang's 23 Things They Don't Tell You About Capitalism).
There is a sense in which imposing these maximum wage ratios is a defiance of market forces. Liberals may oppose this for ideological reasons, extolling the freedom of choice afforded by free markets, as well as for economic reasons, as the practice would, in the long-run, lead to a scarcity of skilled managers (a shortfall of supply relative to demand) if adopted on a wide scale.
Now, even if it were true that the practice was indeed defying the market, it would still be defensible. After all, markets are never 'free' in the sense envisaged by hardcore liberals in the Milton Friedman school (see Chang's 'Thing #1' for more on this). We all (well, most of us) agree that child labour should be banned, for instance, which is a far more radical policy than limiting executive pay. There is no reason, in short, why we should acquiescently accept the outcome of the market.
More importantly, however, cooperatives are not defying market forces by refusing to pay executives the exorbitant salaries they would receive in capitalist corporations, because those salaries are not determined by market forces. As Chang rhetorically asks, is it really conceivable that a manager is 400 times more productive than the average worker? Is it really conceivable that managers have become 10 times more productive than in the 1960s, as would be the case if their salaries were purely a reflection of the value they bring to the company? Is it really conceivable that managers in the US and the UK are more productive than their counterparts in other parts of the world, despite losing out to those countries competitively?
The resounding answer is 'no'. As Chang explans, managerial salaries (not to mention the vast benefits they receive in the form of stock options, severance packages, etc.) are not determined by market forces; rather, just as neoclassical economists have long bemoaned the power of trade unions to inflate workers' wages, managerial salaries are a reflection of 'institutional factors' deriving from the messy relationships betwen managers and shareholders inherent in corporate business - relationships which are avoided in cooperatives. So, a 1:3 ratio may not be a perfectly accurate reflection of the supply and demand for managerial talent, but is is probably more accurate than a 1:300 ratio (not uncommon in capitalist corporations)!
Of course, maintaining managerial pay ceilings on the level of a single enterprise is a challenge. Skilled managers, who could earn 100 times more in a conventional firm, are likely to be repelled from working in a cooperative. To put this into perspective, managers who could earn $10 million a year in a corporation may have to put up with a salary of $100,000 in a cooperative - hardly meagre, but nevertheless a substantial opportunity cost. To a large extent, cooperatives like Mondragon must therefore rely on ideological motivations of potential candidates. In fact, this is one of the primary reasons that Mondragon engages in internal management training - in order to train managers who are not only skilled, but also motivated by cooperative principles.
Most cooperatives, however, will probably not be able to afford such training programmes, and will have to rely on hiring managers externally - yet another reason why isolated cooperatives may appear inefficient given the status-quo, even though an economy dominated by cooperatives may be more efficient than our current set-up.
There is a sense in which imposing these maximum wage ratios is a defiance of market forces. Liberals may oppose this for ideological reasons, extolling the freedom of choice afforded by free markets, as well as for economic reasons, as the practice would, in the long-run, lead to a scarcity of skilled managers (a shortfall of supply relative to demand) if adopted on a wide scale.
Now, even if it were true that the practice was indeed defying the market, it would still be defensible. After all, markets are never 'free' in the sense envisaged by hardcore liberals in the Milton Friedman school (see Chang's 'Thing #1' for more on this). We all (well, most of us) agree that child labour should be banned, for instance, which is a far more radical policy than limiting executive pay. There is no reason, in short, why we should acquiescently accept the outcome of the market.
More importantly, however, cooperatives are not defying market forces by refusing to pay executives the exorbitant salaries they would receive in capitalist corporations, because those salaries are not determined by market forces. As Chang rhetorically asks, is it really conceivable that a manager is 400 times more productive than the average worker? Is it really conceivable that managers have become 10 times more productive than in the 1960s, as would be the case if their salaries were purely a reflection of the value they bring to the company? Is it really conceivable that managers in the US and the UK are more productive than their counterparts in other parts of the world, despite losing out to those countries competitively?
The resounding answer is 'no'. As Chang explans, managerial salaries (not to mention the vast benefits they receive in the form of stock options, severance packages, etc.) are not determined by market forces; rather, just as neoclassical economists have long bemoaned the power of trade unions to inflate workers' wages, managerial salaries are a reflection of 'institutional factors' deriving from the messy relationships betwen managers and shareholders inherent in corporate business - relationships which are avoided in cooperatives. So, a 1:3 ratio may not be a perfectly accurate reflection of the supply and demand for managerial talent, but is is probably more accurate than a 1:300 ratio (not uncommon in capitalist corporations)!
Of course, maintaining managerial pay ceilings on the level of a single enterprise is a challenge. Skilled managers, who could earn 100 times more in a conventional firm, are likely to be repelled from working in a cooperative. To put this into perspective, managers who could earn $10 million a year in a corporation may have to put up with a salary of $100,000 in a cooperative - hardly meagre, but nevertheless a substantial opportunity cost. To a large extent, cooperatives like Mondragon must therefore rely on ideological motivations of potential candidates. In fact, this is one of the primary reasons that Mondragon engages in internal management training - in order to train managers who are not only skilled, but also motivated by cooperative principles.
Most cooperatives, however, will probably not be able to afford such training programmes, and will have to rely on hiring managers externally - yet another reason why isolated cooperatives may appear inefficient given the status-quo, even though an economy dominated by cooperatives may be more efficient than our current set-up.
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